RealPage, Collusion, and Rents: Part 2

I previously wrote about RealPage, the landlord management software that has been accused of price fixing rents for landlords.

The explicit claim is that the software strongarms landlords into holding units vacant in order to raise rents. And, where the software has enough market share in a local market, that coordinated effort can raise rents.

There are a lot of questions you should have about that claim. I tried to ask some of them in the previous post. One of the points I made was that the accusers’ theory about how it works isn’t really a coherent description of oligopoly.

The explicit claim is that the software results in higher vacancies. So, the landlords are still producing the product. They just aren’t selling it.

It would be like if OPEC limited selling volumes, but still drilled for all the oil and just burned off the extra. Or if monopolists reduced production to create elevated prices, but still hired a full staff and just had the unused staff sit around doing nothing.

In both cases, it might still be more profitable to waste the extra production if demand is inelastic, so that prices go up more than the quantity sold goes down. But, it still would be odd to do it.

Maybe there are examples where collusion exists and plays out that way. It’s a big, complicated world. If anyone knows of one, please mention it in the comments.

Critics might respond that if the software wasn’t earning them higher profits, they wouldn’t subscribe to it. But I think they are begging the question. There are countless price management consultants and software products. Do they all have to rely on collusion to be valuable?

Knowing the right price for something has value for both producers and consumers.

One way the software might help landlords increase income as a result of the shared information is on units rented to existing tenants. Rents on empty units are easy to track because they are advertised. But, renewed leases aren’t advertised. So, by sharing that information, landlords can have a better idea of the market price.

Part of the cost of being a landlord is dealing with bad tenants. So, when a tenant is good - they pay rent on time, take good care of the unit, don’t irritate their neighbors, etc. - they are worth keeping. And, switching tenants is costly. The unit is empty for a while. It has to be advertised, etc. For these reasons, existing tenants frequently pay lower rents than new tenants.

Not knowing the right price for existing tenants can be costly, and the costs are asymmetrical. If you price existing tenants too high, too many good ones will move away, and you would know that you erred. But, if you price existing tenants too low, you just have lower income. There isn’t a natural mechanism for knowing if you are priced too low or by how much.

So, the information could help landlords raise their incomes. But, that would be purely a price discovery function.

If they raised their rents on existing tenants too high, they would lose good tenants. They can already discover when rents on existing tenants are too high. They can’t easily discover when they are too low. The lack of good information would naturally lead landlords to be biased toward underpricing rents for existing tenants. Better information would likely lead to increased rents on average. But, it wouldn’t be collusion. It would be price discovery.

I wonder if the courts would be able to make that distinction, or if they will treat any increase in rents related to the software, a priori, as collusion.

The right price is always good. It serves a public function. If landlords have tended to underprice some units, then demand was artificially subsidized for some tenants, leaving fewer, more expensive units for other tenants.

Or, think of it this way. Take a city like Los Angeles, which has basically legislated the regional displacement of 50,000 households annually by obstructing new housing.

Let’s say that RealPage suggests raising the rent on an existing tenant, and a tenant decides to move out of the city altogether. Those who are reporting on the RealPage issue would treat that outcome as self-evidently bad and they will treat the displacement as if it is the fault of the software. But, the software can’t change the number of families that will be displaced from Los Angeles this year. That’s going to be 50,000 families regardless of how much of a discount existing tenants get on their units.

If pricing the unit right leads that tenant to move, then some other family won’t move.

And, in regions that don’t legislate displacement, the higher rent will induce more construction so that 50,000 households moving out of Los Angeles will have more affordable options elsewhere.

Think of underpricing rents for existing tenants as a sort of emergent form of “inclusionary zoning”. Inclusionary zoning is a system where a city requires a certain portion of units to be priced below market value. IZ causes housing production to decline and rents to rise wherever it is tried.

Where landlords have poor information on the market rent for existing tenants, they are practicing accidental inclusionary zoning. Accident or no, the results are the same.

Housing is a prejudice detector.

There are several questions to ask about RealPage. Can it be collusion in a technical, legal sense? How much of a market would need to use it to affect collusion? Are apartments standardized enough to allow for price fixing? If they are, how many non-price margins can landlords use to compete on non-price grounds? Can collusion work without the power to block new entrants? Would relative changes between owned stock versus rented stock affect the ability to maintain a fixed price? How many vacancies would be required to make an economically meaningful difference? Are vacancies elevated in any of the markets where accusations of RealPage rent hikes have been levied? Since higher vacancies are usually associated with lower rents, how do we model the process through which the collusion works?

RealPage is becoming a favorite topic for anti-YIMBYs. I don’t see evidence that any of them have wondered much about any of those questions. I think asking even a subset of those questions makes it clear that systematic, meaningful rent inflation from collusion through RealPage is implausible.

Actually, housing is kind of simple. We have a problem. In most urban places, the most appropriate form of housing for most lots is illegal. If you try to build it, there will be a meeting where the answer is “no”. Millions of households also now cannot fund the purchase of a new house. For frequently arbitrary reasons, they go to the bank to get a mortgage, and the answer is “no”.

Our problem is really simple. We have constructed a set of obstructions before this important human need. We don’t have enough housing because the answer is “no”.

RealPage isn’t the only implausible alternative explanation. When you dig down on every alternative explanation, you will find that it is implausible. That is why I am a decade into this project. I kept finding that all the explanations for high housing costs weren’t just wrong. They were implausible.

Why is it so hard to accept the simple, clear explanation for high housing costs? I don’t know. But, this does create an opportunity. It’s a special situation where the gap must be filled with explanations that will be wrong, or at least that will need to be greatly exaggerated to fill the gap.

Who knows? Maybe RealPage can lead to permanent rent increases of a few percentage points. Even in that case, it is barely worth mentioning on the broader topic of why rents are inflated by something like 50% on average.

Fannie and Freddie? Federal tax subsidies? Speculation? Reckless lending? Immigration? High-income workers? Colluding builders, landlords, developers, etc.?

How people line up on these issues about which symptom of a housing shortage to treat as a cause, or which empirical claim will be bloated and blamed for high costs, is mostly a window into their prejudices. What subject are they most likely to cast aspersions on based on weak evidence?

If someone centers RealPage in the housing discussion, they probably can’t be trusted as an observer on anti-trust issues, in general.

If someone centers Fannie and Freddie, they probably can’t be trusted to objectively consider public programs in general.

If someone centers reckless lending, they probably can’t be trusted to objectively consider banking regulations.

If someone centers immigration, they probably were anti-immigrant anyway.

The housing problem is simple. We say “no”. There isn’t much more to learn. Solving it is a political problem more than an economic one. But there is a lot to learn about its detractors.