There is a minor crisis in non-commercial real estate rentals in the United States. In some cities, the cost of rental property is simply out of control. Available rental property is scarce, and thus prices are high – higher than many people can afford. Some of this is a function of the pandemic. Apartment and housing construction declined, and supply chains were severely disrupted in all sorts of ways. Suddenly my older car was worth more because new cars were not available. But ramping up production for automobiles is far easier than quickly building new housing. Especially for middle and low income families, housing is in short supply.
A 2020 study showed that housing is the largest expense for American families and that one in four families spend half of their family income on rent. This leaves many families with inadequate funds for food, utilities, clothing, health care, and transportation, and almost nothing for anything else. As the housing scholar Matthew Desmond has smartly noted, “the rent eats first.” The number of families who are unable to pay their rent keeps growing.
The shortage of available housing leads to what we might call “trickle up” economics. As housing becomes scarce, prices rise for everyone. Homeowners don’t usually notice this because they have mortgages. When they want to sell their house, condo, or apartment, they are often thrilled to discover how much their real estate is worth; but they may be shocked when they want to buy or rent their new place.
This is a looming crisis in American society that Congress, paralyzed by toxic politics, has not dealt with.
In the past few years, Congress has allocated much needed funds for infrastructure, in part because whatever your party, no one wants to drive on a bridge that may collapse or drive on a road that might crumble. But the lack of rental space is less noticeable, unless you need an apartment for children in college or you want to downsize to an apartment when your empty nest is just too empty and too big. Or, if you are a young professional with a good job, a handsome salary, and a bright future, and are still unable to afford (or find) an apartment reasonably close to where you work. Rents are sky high almost everywhere.
Complicating this is the rise of algorithms (a mode of aggregating and analyzing data), and artificial intelligence – the new buzz word or bogeyman of American society. Americans have been using this technology for years without even knowing we are doing so. This is what allows my Garman to plot a route. I still sometimes read a map, but my GPS finds routes I would never think of, especially when I am not on an interstate. Many of us talk to Siri or Alexa and get great answers, really quickly. When we sometimes get a totally stupid or incoherent answer. we rephrase the question until Siri or Alexa understands us. Want to sell your car? The Kelly Blue Book helps you figure out what to charge. Want to sell your house? Go to Realtor.com, Zillow, Redfin or some other website. You will get a ballpark figure. It may be too low or too high, but it’s a start.
What we all know about real estate is what our first real estate agent told us: the three most important things that determine the price of a house are location, location, and location. But we all know that is only partially true. There are so many other things that affect how a house is priced and what it will sell for. The same is also true for your used car, despite what Kelly Blue Book says.
Use of algorithms and AI has led to a complex case involving the real estate revenue management software company RealPage, which is now before the U.S. District Court for the Middle District of Tennessee in Nashville, with the distinguished jurist, Waverly D. Crenshaw, Jr., presiding.
Crenshaw, a graduate of Vanderbilt University and Vanderbilt Law School, was unanimously confirmed by the Senate (92-0) in 2016. The Judicial Panel on Multidistrict Litigation transferred the case to Crenshaw’s court.
The Department of Justice and the Federal Trade Commission are suing RealPage under the Sherman Antitrust Act. The allegation is that RealPage is involved in a massive price fixing scheme for rental property.
Aggregation of Data
RealPage recommends pricing for apartments within multifamily housing properties. To determine the recommended rental price, RealPage aggregates rental prices in markets using data that in part comes from landlords, runs the data through complex computer models, and reports back to its clients what RealPage thinks the rental price should be.
No one disputes that RealPage collects data from various rental companies (who presumably compete with each other), aggregates the data, and tells their clients (rental companies) what rent RealPage thinks the companies should charge. RealPage asserts it does not tell clients what to charge, but only advises them on market conditions and makes recommendations. The FTC says this aggregation of data violates the Sherman Anti-Trust Act because the data comes from competitors, which leads to an uncompetitive and unfair market.
Central to the claim of creating an uncompetitive market (which of course has yet to be proven) is the government’s assertation in its memorandum of law that RealPage “puts significant ‘pressure’ on” its clients to get them “‘to implement RealPage’s prices,’ including by requiring clients to submit requests to deviate to the ‘corporate office.’” Plaintiffs in associated class action suits assert that RealPage requires its clients (usually large companies that own many rental units) to charge what RealPage tells them to charge. RealPage says this is not the case, that all the company does is “recommend” a rental fee.
At first glance the assertions of the DOJ and other plaintiffs seem implausible. In a tight market, a rental company has an incentive to raise prices to capture what the market will bear. In a weak market, rental companies have a huge incentive to lower prices because every day an apartment remains vacant, the company loses money. Lost rental income, like unsold tickets to a sporting event, cannot be recouped if the property is vacant. If a car doesn’t sell today, the dealer can sell it tomorrow, and the only loss is the minor time value of selling the car later. But, a vacant apartment, even if rented a month or two later, is a dead loss for the time it is empty. Market conditions can be volatile, and it is hard to imagine that any company would lock itself into a fixed rent based on a contract with RealPage. I might be wrong about this, of course, but that is why we have trials and evidence.
It also strikes me that competition for renters, even in a tight market, is likely to undermine this theory. Rental prices are hardly secret. On the contrary, they are advertised and easily available. Everyone knows (or can easily find out) what the competition is charging.
In addition, aggregating data could potentially help consumers.
RealPage might easily make its data (in some form) available to real estate or rental agents and to renters. Then it becomes like Kelly Blue Book, allowing everyone to know what the rental market looks like.
Finally, anyone who has ever rented an apartment knows that it is not only about location, location, and location. It is also about amenities, public space, parking, security, the gym, layout, rules for pets, and even the condition of the building. Unlike a car, it is rare to find identical apartments in different places or even in the same complex.
There are serious issues in this case about data and algorithms. Most of us don’t understand these issues, just like we do not know how a computer works.
Role of A.I.
Artificial intelligence (AI) is a very serious issue. It can be used for fraud, insider trading, theft, other criminal activity, and just plain nastiness. But is a U.S. district court the place to sort this out? Congress needs to step up to the plate, appoint a serious commission of experts to figure out how we regulate this new technology.
There are valuable precedents for this. Congress passed laws to prevent radio stations from drowning each other out, and the FCC works pretty well. The FDIC prevents panics and runs on the bank. So does the FAA. Airplanes are pretty safe, and commercial planes almost never fly into one another.
Perhaps it is time for a serious regulatory agency for technology. We also may need a new federal court. We have bankruptcy courts, tax courts, special courts for veterans, military appeals courts, family courts, juvenile courts and many more. It is probably time for a new federal court to deal with technology. Judges will come from the patent bar, the civil liberties bar, and from specialists in fraud and other crimes. Cultural changes and new technologies have often led to new laws and the creation of new courts and new regulatory agencies. We did not need the Sherman Anti-Trust Act until we had large corporations (especially railroads) and trusts that undermined competition and a fair economic playing field. In 1914 the increasing complexity of interstate markets and production, and the growing concentration of economic power, led to the Federal Trade Commission.
The mass production of food (especially meat) and pharmaceuticals led to the Pure Food and Drug Act and regulatory agencies. There were no traffic courts before we had cars and traffic. Perhaps it is time for an internet traffic court as well as serious discussions of technology regulation. Some people in Congress have suggested we “ban” artificial intelligence. That would be about as “intelligent” as banning flight after the Wright Brothers took off at Kitty Hawk or banning the printing press (as some countries tried to do) after Guttenberg published his first Bible. Indeed, anyone suggesting we ban this technology might actually need some artificial intelligence.
If RealPage threatens open markets and fair competition then there are laws to deal with that. But, if this is a complicated application of a new technology, we need to figure out how to manage it, regulate it, and let the innovation of entrepreneurs and computer scientists help move our economy to the next level.
Finally, Congress and the states need to step up to the plate and encourage more building of homes and apartments. We need to commit to solving the housing and a real estate rental crisis. Whatever RealPage has done, it certainly has not caused the spike in rental property prices or the shortage of affordable housing.
CNBC has reported “that asking rents in the U.S. ticked down to $1,964 a month in December 2023, a decline from recent highs. Prices are coming down in markets such as Atlanta and Austin, Texas, where home construction is high. But analysts believe low rates of homebuilding on the U.S. East Coast could give well-located landlords more pricing power.”
New tax policies, increasing availability of mortgages for first time buyers, state and local government policies that encourage the development of new apartments, and increased subsidized housing for the poorest Americans are central to the near and long-term health of the nation. Regulations that are not fully thought through and debated for RealPage and similar services are not likely to be useful in the long run, especially when these services may very well evolve into the Kelly Blue Book for landlords and renters.
Paul Finkelman is the Robert F. Boden Visiting Professor of Law at Marquette Law School
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