Pricing Algorithms Cost Renters $3.8 Billion In 2023 Says White House

Optimization means getting something as good as it can get. When a company like an apartment landlord looks to optimize rent rates, it probably means maximizing the money they get.

This may sound synonymous with increasing rents. It may be but isn’t necessarily. For example, if a landlord might increase the amount of money by slightly decreasing the amount they collected from tenants. Sound crazy? Stay with the argument for a moment.

When tenants leave, there’s typically a significant turnaround time to fix and repair the unit to ready it for the next renter. The necessary amount of time can be surprising. You, the landlord, may have to skip a month because someone may not be ready to move in exactly when you’re finished with those preparations. If lowering rent slightly gets tenants on average to stay a little longer, it might be that over a period you have a smaller percentage of inactive time and, so, more money. That would be a form of optimization.

However, when it comes to renting out apartments, optimization is more likely to mean getting information that tells you how much you more you could charge. And that’s the alleged reason why the Department of Justice has taken legal action against some real estate vendors that have price optimization software.

The DOJ argued in one 2023 case that the software systems in question effectively let landlords work together because they know what others are successfully charging. This is called concerted action and, as the DOL lawyers quoted previous case law, “is fraught with anticompetitive risk.” That when separate decision makers work together, that can reduce market competition by depriving the market of “independent centers of decisionmaking.” That gives consumers fewer choices.

One company, RealPage, explicitly claims that its AI revenue management software “outperforms the market 2% – 5%.” In theory, that could be the type of action where landlords lower prices to get better overall effects and improved rents over time. Or, as some have claimed, it could instead be price fixing.

The Biden White House’s Council of Economic Advisors (CEA) argues that the result is higher rents on average of $70 per month — 4% of rent — and that collective 2023 costs to renters was $3.8 billion. That, they say, is likely a lower bound, with the true costs higher.

RealPage has two different rental pricing algorithmic programs that the CEA says is used in at least 10% of all rental units nationally. Small landlords, who own a significant portion of apartment units, aren’t operating on the level that would support the cost of such software.

“Pricing algorithms may help landlords and building managers set prices that are more responsive to market conditions, which could increase market efficiency in a competitive market,” wrote the CEA. “But the algorithms can also facilitate price coordination, which decreases market efficiency by harming competition.”

RealPage claims that the allegations are false. That its customers determine their own rents, are never punished for refusing to use the suggestions, and that the software makes recommendations of raising, lowering, or keeping current pricing “to alight with property-specific objectives.” Also, that the number of apartments units that use the software is much smaller than allegations and that “RealPage’s revenue management products use nonpublic data only in anonymized, aggregated forms such that customers gain no insight through the software into their competitors’ specific prices or strategies, which is perfectly consistent with the antitrust laws.”

Then there is the volleying of arguments. The government says RealPage pushes its customers to use automatic pricing suggestions and that the company makes rejecting a price difficult and costly. RealPage basically says that claim is nonsense.

Multiple cases are happening. The ultimate outcome is unknown and the impact on renters is uncertain. But it’s worth for renters to keep an eye on the development.