Could An Algorithm Be Why You Can't Afford The Rent?

Oregon Sen. Ron Wyden and the Federal Trade Commission (FTC) say the high rents in many major American cities are the result of a computerized, algorithmic collusion with major landowners to lease rates them higher than they should be. 

What Is Algorithmic Collusion?

Wyden and the FTC are not alleging a direct case of price fixing where landlords secretly meet in a cigar-smoke-filled room and agree to charge a certain dollar amount per square foot. The collusion he's concerned about is indirect and revolves around the collective use of property management software and data sharing by landlords. The software, which has names like RENTmaximizer, uses algorithms to calculate rents for millions of apartment units nationwide.

The algorithm works by combining price data shared by users across the country to determine market rental rates for vacancies and rent increases for residents with expiring leases. On the surface, that sounds innocuous, but more residents are feeling the pinch and beginning to notice the algorithm never seems to calculate the rent downward.

Residential Rents Are Spiraling Upward

FTC data shows residential rents have increased by 20% nationwide since 2020, and the highest increases are in the middle to lower tiers of the market. Not only is the rent going up, but it's going up higher for people who can least afford it. This has created a situation where more than half of America's renters are paying over 30% of their income in rent.

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That threshold is critical because tenants are generally considered rent-burdened when they pay more than 30% of their take-home pay in rent. Tenants in that situation are never more than one unexpected bill from not being able to pay their rent and becoming homeless. The increasing consolidation of multifamily properties in the hands of funds and management companies means Americans have less choice despite the availability of many apartments.

Apartment Renters Have Less Choice As Ownership Consolidates 

This puts tenants in a position where they'll get a rent increase from their apartment community, then shop around only to find that nearly all nearby communities are charging almost the same rent. In many cases, the other apartment communities they're looking at are owned by the same entity that owns the community they are looking to move out of.

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Even if another community has a different owner, it's likely to be a real estate investment trust (REIT) or other entity that generates investor returns by raising rents. If owners of all the communities tenants consider are using the same type of software, the algorithms will likely generate rents within a pretty tight range. Wyden and the FTC believe the use of algorithms is leading to a doom loop where renters can't escape high prices.

Wyden, The FTC And The Justice Department Push Back 

Wyden, the FTC and the Justice Department are poised to act. Earlier this year, Wyden introduced the Preventing Algorithmic Collusion Act. It would make using software and algorithms to calculate rent increases a violation of the Sherman Antitrust Act. It would also prohibit two or more property owners from sharing information such as rent data and occupancy rates with each other.  

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The FTC and the Justice Department have jointly filed a legal brief affirming their shared belief that using algorithms to determine prices is not a legal work-around to existing prohibitions on price-fixing. The brief also insists that landlords who use algorithms or software to calculate rents can still be held responsible for price-fixing and collusion even if they don't follow the algorithmic price recommendations to the letter.

Will Getting Rid of Algorithms Lower Rents?

Wyden's bill has solid support among progressives, but there is no guarantee it would get through a Senate where Democrats only have a one-vote majority. The chances that it gets out of the Republican-controlled House of Representatives are even lower. What's not clear is whether the bill would work to lower rents. Even without further use of the algorithm, landlords have already raised rents significantly.

In years past, tenants' ability to purchase a home limited many landlords' ability to continually raise rents. However, average home prices in most American cities are conspiring with a lack of inventory and high interest rates to make that option less likely for most renters. 

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