https://www.thebignewsletter.com/p/up-to-a-quarter-of-rental-inflation [https] BIG by Matt Stoller SubscribeSign in Share this post [https] Up to a Quarter of Rental Inflation Is Due to Price-Fixing www.thebignewsletter.com Copy link Facebook Email Note Other Up to a Quarter of Rental Inflation Is Due to Price-Fixing From 2020-2024, rent prices spiked by a third. How much of that is due to collusion by corporate landlords and a software coordinator? And where is the Fed? Matt Stoller Sep 19, 2024 84 Share this post [https] Up to a Quarter of Rental Inflation Is Due to Price-Fixing www.thebignewsletter.com Copy link Facebook Email Note Other 2 Share Late last month, the Department of Justice filed a complaint against a software and consulting firm called RealPage, alleging a broad conspiracy among corporate landlords to increase rents to millions nationwide. RealPage sold software and services to large real estate management firms, which in aggregate control rents for 16 million units nationwide, which is a not small fraction (36%) of the 44 million renting households in America. This alleged conspiracy matters for a lot of reasons, but the most important one being that housing costs are a crisis in America. Last week, the government released statistics showing that rent went up by 5% over the past twelve months, and that the cost of shelter accounts for 70% of all inflation for the last twelve months. The CPI matters, because the key price control agency in the economy, the Federal Reserve, sets prices for credit and loans based on this data, rationing credit to, say, small businesses based on what its economists think about how that will affect demand. Higher rent prices, in other words, are not just a problem for families trying to get shelter, but are actually impacting macro-economic policies for the entire economy, shifting the cost of financing every city, factory, airplane, credit card, et al. And that brings me back to the Antitrust Division's lawsuit against RealPage. Is this case more than an (alleged) price-fixing conspiracy? Could it point to a broader problem in the economy? Let's start with what this firm actually did. RealPage allegedly encouraged excess rental prices in a number of ways. First, it collected sensitive information about the market and let its clients know what everyone else was charging. Second, it explicitly encouraged rent hikes through default settings in its software, and by having its RealPage "pricing advisors" harass employees of clients until they raised rents. As one unnamed landlord put it, "I always liked this product because your algorithm uses proprietary data from other subscribers to suggest rents and term. That's classic price fixing." And finally, it hosted in-person meetings where its clients would talk with one another about raising prices. Image How much did this alleged conspiracy foster the spike in rents happening since Covid? "I think it's driving it, quite honestly," one executive of the RealPage said in 2022. So why don't we hear more chatter about it in the political press? After all, Kamala Harris' economic plan seeks to address rent, with a specific call-out of rental price-fixing. But so far, most politics and economics reporters have ignored this massive antitrust suit. I can't totally blame reporters, since there's no context for how much rental price-fixing matters. The RealPage scheme looks sordid, but not like something that affects the macro picture. The reason is because no one has put a number on the scandal, and no economist has delved into this particular market. So I decided to go into the various complaints against RealPage and corporate landlords, and try to assess just how much less people would be paying in rent had this alleged conspiracy not happened. Basically, I want to put a number on this scandal. My calculations below are quick and dirty, I'm by no means an expert on rental data or rental pricing. But I wanted to put out something to give us context on what we're talking about. What I've found is that up to a quarter of rental inflation between 2020-2024 is potentially due to this alleged conspiracy. There is, of course, a big range. It could be more than that, since RealPage says it achieved "critical mass for revenue management adoption" in 2016, and these increases tend to be cumulative. It could also be much less, since it's possible that RealPage was overstating its power to its clients, and that it affects far fewer units than assumed. (It's also possible that RealPage didn't orchestrate a conspiracy, but since most antitrust lawyers across the spectrum were shocked at the details in the complaint...) --------------------------------------------------------------------- BIG is a reader-supported newsletter focused on the politics of monopoly and finance. If you are not yet a paid subscriber, please consider becoming one. BIG is journalism and advocacy that challenges power. You can always get lies for free. The truth costs a few bucks, but in the long run it's much cheaper. [ ] Subscribe --------------------------------------------------------------------- First I'll note that it's quite likely that RealPage is affecting rental markets in some systemic way. Here's the Arizona Attorney General, Kris Mayes, in the complaint against RealPage: "The Tucson metropolitan area, where about 37% of households rent, has also seen historic rent increases--30% in the past two years." That's in just the last two years, and Mayes argues that RealPage is a big factor. The results have been stark in other cities as well, like Atlanta, where rents went up by 56% since RealPage really took control of the landlord software market. [https] Here are metro areas where RealPage clients have a big presence, according to the DOJ complaint: Anaheim, Atlanta, Austin, Baltimore, Birmingham, Boston, Charleston, Charlotte, Colorado Springs, Columbus, Dallas, Denver, Ft. Lauderdale, Fort Worth, Hartford, Houston, Jacksonville, Kansas City, Las Vegas, Memphis, Nashville, Orlando, Phoenix, Porltand, Raleigh, Reno, Richmond, San Antonio, San Deigo, Seattle, Tampa, Tucson, and Washington, DC. That's about 100 million people in total in those metro areas. So how did I get my numbers on the consequence of RealPage nationwide? Well, let's start with how much rent has gone up since Covid. You can draw from different sources. Rental inflation nationwide really started hitting in a highly noticeable politicized way in 2021. Today, the median rent, according to Zillow, is $2070/ month, with rent up by 33.4% since the pandemic. CoStar, a different source, says rent is up just 19% in the past five years. The Consumer Price Index has it at 24% from 2020-2024 for urban consumers. There are many kinds of rental units and regions, which probably accounts for the differences. So say 19% as a lower bound for broad rent inflation, and 33.4% as upper bound. [https] [https] How did RealPage impact price? According to its own marketing documents, RealPage's service is designed to offer a "revenue lift between 3% to 7%" year over year, even in downturns. So I took 3% as the lower bound of increases due to this corporation, and 7% as the upper bound. The Antitrust Division defines the conventional multi-family rental market, which includes apartments in buildings - not including student, senior, military, single home, and low income housing. There are 14 million units in that market, out of a total of 44 million for all renting households. Corporate landlords using RealPage pricing software control either 3 million units (according to the DOJ), or 4.8 million (according to RealPage sales). The market definition here is fuzzy, of course, and you could say there are many more units for rent, or fewer. Some of the other sectors, like student housing, have their own algorithmic collusive actors, but complaints against them have been dismissed. (There is also a lot more landlord price fixing happening across the board with non-fancy methods.) RealPage is concentrated in certain cities, so we're not talking an even increase across the country, though there could be some spillover effect of higher rents in general. We do know, however, that this software is having an impact on rental markets. In the Arizona AG complaint, there is regression analysis showing that RealPage-orchestrated units are priced 12% higher than non-RealPage units, across all unit variations. 1 bedroom, 2 bedroom, 3 bedroom, and studio all show the same pricing difference. This chart represents units in Phoenix. [https] And this one's from Tucson, which has a 13% pricing difference between RealPage and non-RealPage units. [https] One characteristic of RealPage's alleged conspiracy is pulling units off the market, so that's going to affect all apartment pricing. So we can assume that RealPage isn't just doing a 12-13% bump in these cities for apartments, but is bringing up the entire market. That's called the "umbrella effect," where a price-fixing conspiracy helps everyone in an industry, even those not participating in it. What do these numbers mean nationwide? Well there are RealPage dominated cities and non-RealPage cities. Let's start with conservative assumptions, and pretend that RealPage sales people were mostly bragging, and weren't able to increase rents very much, only at the bottom of their range of 3%. Moreover, let's say RealPage landlords only controlled 3 million units, and there was no generalized rent increase spillover to other units outside of RealPage dominated metro areas. The Weak Scenario In that scenario, in cities where RealPage landlords had market power, the extra rent hike is 13% over four years, or $234/month. A renter should be paying $1839, but is instead paying $2070. So a little over a tenth of total rent paid is purely due to this alleged price-fixing conspiracy. That's either 58% of all rental price inflation during Covid in those cities if total inflation is 19% as CoStar says it is, or a third of rental price inflation if rental inflation is 33% as Zillow says it is. But of course, not all cities are dominated by RealPage, and a lot of units are owned by mom-and-pop landlords. If you average the RealPage increase out over all rental units nationwide, you'd find that's an average of $16/month of extra payment, which is a little less than 1% of all rent paid. The Middle Scenario Ok, now we'll go to mid-tier. We'll assume that RealPage's pricing tools and meetings really work, and price increases were at 7%. But we'll keep the number of units in the conspiracy at 3 million, and assume no spillovers to the non-RealPage cities. In one of those RealPage affected cities, you should be paying $1579 instead of $2070, which is a difference of $491, every single month. That's almost a quarter of your rent. If you back out, and average across the whole country to non-RealPage affected areas, it's a difference of $54/month, 2.6% of all rent, and 14% of rental inflation. The Aggressive Scenario Finally, we'll assume the same 7% increase, but assume RealPage landlords controlled 4.8 million units, and do a spillover of 2% a year across non-RealPage units. After all, some people in expensive cities will leave, and that's going to drive rental prices up elsewhere. Moreover, landlords talk, so price collusion in one area will commonly encourage it in others. Once again, in a RealPage affected city, you should be paying $1579 instead of $2070, which is a difference of $491, every single month. That's almost a quarter of your rent. When you average across the whole country with the spillover assumption, you get 24% of rental inflation due to this alleged conspiracy. Whither the Fed? These are some real back-of-the-envelope calculations, but since there's nothing out there, I figured I'd offer something. And last time I tried this experiment, in 2021, when I pointed out corporate profits drove 60% of inflationary increases, I wasn't far from the mark. Now, housing is an odd complex series of regional markets, and my assumptions are just assumptions. It's also possible that I missed something big and obvious. But someone should try to put a number on the total cost of this alleged conspiracy. I mean, there are plenty of skeptics of the premise that such schemes impact broad pricing aggregates. Shouldn't they at least prove it didn't matter? Where's the curiosity? Beyond curiosity, there is at least one important institution whose mandate is to care about pricing - the Federal Reserve. The Fed's statutory mandate is stable prices and full employment, and they employ thousands of economists across their system. So you would think a scheme that suggests price distortions in one of the most important contributors to the Consumer Price Index - shelter - would be of great interest. But so far, not so much. And academic economists, who are usually part of the Fed-world in one way or another, tend to avoid research in this area or are extremely leery of going where there isn't sufficient data, because challenging orthodoxies on pricing power is offensive to the profession. This situation, where regulators and antitrust enforcers uncover how pricing works within markets and yet are ignored by the macro-economists at the Fed, is silly. We shouldn't be making monetary policy based on vibes, yet that seems to be what's happening. Either way, feel free to prove me wrong with your own numbers. We should start figuring out the macro impact of pricing power. --------------------------------------------------------------------- Thanks for reading. Send me tips on weird monopolies, stories I've missed, or comments by clicking on the title of this newsletter. And if you liked this issue of BIG, you can sign up here for more issues of BIG, a newsletter on how to restore fair commerce, innovation and democracy. If you really liked it, read my book, Goliath: The 100-Year War Between Monopoly Power and Democracy. cheers, Matt Stoller 84 Share this post [https] Up to a Quarter of Rental Inflation Is Due to Price-Fixing www.thebignewsletter.com Copy link Facebook Email Note Other 2 Share Discussion about this post Comments Restacks [https] [ ] Greg Taylor 1 hr ago Good thinking on rental monopolies. To get at more real issues, consider that many of the worst landlords driving this activity are private equity owned. Anyone interested can read up on PE (E Applebaum and Batt) is a start. NakedCapitalism has good overviews as well. Key questions: 1. Why are PE landlords so willing to push legal limits and risk costly lawsuits? My hypothesis: the general partner likely gets to shove the costs onto the limited partners. Many foreign limited partners may not care [https] about returns if they are hiding money from governments or are laundering it for another purpose. 2. What should regulators be seeking in judgements to stop bad behavior by PE landlords (far beyond monopolies). This could be hard if general partners aren't getting hurt by the judgements (which I believe is likely.) 3. Does the good from PE outweigh the bad for society? If not, how can these entities be brought to heel? Expand full comment Reply Share Tim 2 hrs ago You may well be onto something Matt, but to me, this appears to be an effort (conspiracy or otherwise) to take advantage of the 'cover' provided by the rest of the US economy having seen an overall inflation rate of about 20-25% since 2022. And who in power is going to care about the exploding cost of rental property (affecting only 35% of the public) when [https] grocery prices have affected 100% of us? Probably not the democrats, who are only good at 'talking a good ball game' when it comes to the plebs, nor their trained seals in the media, and certainly not the Republicans. But I do agree that if a colorable case for collusion as to price fixing can be made then it should be. Expand full comment Reply Share Top Latest Discussions No posts Ready for more? [ ] Subscribe (c) 2024 Matt Stoller Privacy [?] Terms [?] Collection notice Start WritingGet the app Substack is the home for great culture Share Copy link Facebook Email Note Other This site requires JavaScript to run correctly. Please turn on JavaScript or unblock scripts