Stop Blaming Algorithms: Political Scapegoats Won’t Fix Housing Problems
According to an issue brief recently released by the Council of Economic Advisers, dynamic pricing algorithms are reducing competition in the housing market. The brief’s authors contend that landlords who use these algorithms tacitly collude to raise prices above competitive levels, leaving renters worse off.
This argument and others like it are part of a broader push by Democrats to blame rising prices on companies like RealPage and other dynamic pricing algorithms, instead of the reckless fiscal and monetary policies they enacted.
Rather than address inflation’s underlying causes, Democrats are vilifying landlords. President Biden stated during his State of the Union address last year, “We’re cracking down on big landlords who break antitrust laws by price-fixing and driving up rents.”
Mr. Biden’s remarks weren’t just empty political rhetoric. A few weeks after the President’s address, Sen. Ron Wyden (D-OR) and several Democratic co-sponsors introduced the Preventing the Algorithmic Facilitation of Rental Housing Cartels Act. This legislation would create several undesirable consequences, and before banning these algorithms, Congress should consider how costly these consequences might be.
Firms routinely adopt flexible pricing strategies to deal with fluctuations in demand. Movie theaters, for example, charge lower prices during the day than at night to avoid having empty theaters. As a result, they can operate at higher capacity and lower average cost.
Dynamic pricing algorithms reduce the cost of detecting changes in demand, making it easier for firms to adopt flexible pricing strategies. Uber and Lyft use these algorithmic prices to adjust the number of drivers on the road by communicating surges in demand. As a result, consumers don’t need to wait as long for a ride, and drivers spend less time driving without passengers.
Companies like RealPage do something similar for landlords. The information about pricing they provide reduces landlords’ costs, increasing supply while lowering rental prices. Of course, these algorithms will recommend higher rental prices when the demand for rental housing increases sufficiently, just as Uber and Lyft charge surge prices during periods of high demand like New Year’s Eve.
While no one likes paying more, higher prices serve three crucial functions:
They prevent shortages by ensuring that the demand for rental units does not exceed the number of units available.
They ensure the available rental units go to the consumers who value the housing most.
They create a powerful incentive for developers to build more rental units.
Preventing prices from quickly rising to changes in demand will lead to housing shortages, waste, and fewer rental units. This is hardly good for consumers.
The broader point is that markets work well when prices adjust to reflect changes in supply and demand. All going after landlords who use products like those sold by RealPage will do is slow down this critical price adjustment process, leaving us poorer overall.
Not content with prosecuting landlords who use dynamic pricing algorithms, the Biden Justice Department filed a civil antitrust lawsuit against RealPage last August, alleging that the company facilitated collusion between landlords.
There are several issues with this argument. For one, collusion is difficult to sustain because the colluding parties are all incentivized to lower their prices. If RealPage’s product facilitated collusion, landlords could increase profits by ignoring the company’s rental price recommendations. Essentially, they would be undercutting other landlords using RealPage’s product. If this were happening, landlords would regularly ignore RealPage’s pricing suggestions. But that is not happening. Instead, 90 percent of RealPage’s clients use the company’s recommended pricing.
The lawsuit’s claim is also inconsistent with rental price and vacancy data. First, landlords must keep some rental units off the market to raise prices above competitive levels. If RealPage had made it easier for landlords to collude to raise prices, vacancies would have risen. That is not what we observe. Between the first quarter of 2020 and the second quarter of 2022, the vacancy rate fell from 6.6 to 5.6 percent. More importantly, real (inflation-adjusted) rental prices declined six percent nationally between June 2020 and June 2022. While they began rising again in July of that year, today, they’re only three percent higher than in January 2020 and still well below their pre-pandemic trend.
If Democrats want to make housing more affordable, they should make it easier to build housing. Zoning restrictions, impact fees, building codes, property taxes, energy efficiency standards, and permitting fees all restrict the housing supply, driving rental prices up. Easing these restrictions would go a long way to making housing more affordable.
Blaming landlords and corporations for high rental prices may be good politics, but it is bad economics. Not only will restricting dynamic pricing algorithms not make housing more affordable, it will potentially stifle the development of this valuable technology in other sectors of the economy. Policymakers should keep this in mind.
This article originally was published by the American Institute for Economic Research.