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Introduction and the Emergence of PropTech
From a significant subprime mortgage crisis that pulled people out of their homes in 2008 to the recent global pandemic that pushed people out of cities and moved operations online, Americans have experienced several substantial changes to the housing market over the last few decades. Property technology, or proptech, has emerged from these major events as a tool to access the property transaction life cycle online—including researching, listing, buying, and selling.
Proptech was initially launched in the 1980’s as a way for real estate institutions to manage their portfolios. The early 2000s fostered its growth with the development of real estate tech companies like Trulia and Zillow. These sites secured their hold in the real estate market during the COVID-19 global pandemic when housing processes needed to be online to comply with lockdown and shelter-in-place orders. In recent years, real estate renters, buyers, and sellers have relied on proptech for housing processes like rental searches, applications, and even tours because it is often more efficient and creates more options for all parties in a real estate transaction.
Opportunities to virtually tour a property and submit an application remotely were critical to keeping people housed during the pandemic amidst shelter-in-place orders. Although the real estate industry began exploring the potential in proptech before COVID-19, the pandemic propelled this shift towards proptech because it enabled landlords and brokers to conduct the entire rental process online without ever having to meet an applicant in person or even be on-site at all. Despite the efficiency and opportunity created by proptech and the shift of rental listings to online platforms, several issues remain, including data quality, potential bias in algorithms, and accessibility of these websites. These issues are seen on real estate websites that display listings and receive applications and the algorithms behind these sites and programs. It is imperative to correct this now because American rentership levels have been at their highest since 1965.
It is important to note that proptech has also simplified commercial real estate transactions by generating property valuations and increasing transparency and communication in such transactions.
Pricing Algorithms
Increasingly sophisticated algorithms of Proptech, especially pricing algorithms used in revenue management software, play an active decision-making role in more transactions and may disadvantage average home buyers as well as renters.
The current focus on the controversial role of pricing algorithms started with a 2022 ProPublica report. The report discovered that in multifamily apartment rental markets across the country, many landlords outsource their pricing decisions to revenue management software such as YieldStar by RealPage. The software collects a large amount of market data and recommends rent prices to help landlords maximize their profit. The report concluded that such software is partially to blame for increasing rent prices and housing shortages.
After the publication of the report, several class-action lawsuits were filed by tenants against RealPage and landlords, alleging that the software facilitated collusion among landlord-competitors and that their business practices amount to price-fixing anticompetitive behavior. The lawsuits have consolidated into a single action pending in Tennessee.
In typical antitrust litigation, direct communication between competitors in a price-fixing claim is the smoking gun evidence. However, absent evidence of such direct link between competitors, plaintiffs can survive a motion to dismiss if they can prove some plus factors, such as concentrated markets, high barriers to entry, and inelastic demand.
In the pending case against RealPage, the tenant plaintiffs can point out many plus factors. Location is essential to the real estate market. The alleged market in the case is multifamily apartment complexes in major metro areas. An apartment in a 300-unit complex in downtown LA is not in the same market as a single-family home in a small town in Vermont. In a given geographic area, there are only so many apartments available in a concentrated market. Because of the high capital investment of these multifamily apartment complexes, only a few real estate development and management companies engage in the concentrated market. The barriers to entry are also very high. Last, housing demand is extremely inelastic as people need a place to live. Therefore, the tenant plaintiffs have a strong case to proceed.
In November, the Justice Department recommended the lawsuit move forward against the software company’s motion to dismiss.
Pricing algorithms are not illegal as more companies across different industries adopt dynamic pricing models to maximize their revenue. However, when market competitors outsource their pricing decisions to a single software, the odds of collusion become much higher. A proprietary pricing algorithm would only use a company’s own data, but software like YieldStar would take in private data from competitors and centralize multiple decision-makers in a market to a single decision-maker. A single point of decision-making can artificially increase prices across the board in the market. Although landlord competitors may not directly communicate with each other regarding their pricing strategy, they all communicate with the pricing algorithm. Therefore, the market practice alleged in the class-action suit resembles a classic hub-and-spoke model of conspiracy.
RealPage claims that the software merely provides recommendations and landlord managers can override the software’s rent prices. However, in its own promotional videos, RealPage touts that “the beauty of YieldStar is that it pushes you to go places that you wouldn’t have gone if you weren’t using it,” and its developer admits “leasing agents had too much empathy compared to computer-generated pricing.”
While the civil action in Tennesee is unsettled, government enforcement, from district attorneys to the Department of Justice have opened their own investigations. State and district attorneys general in Arizona and Washington, D.C., have initiated separate lawsuits against RealPage.
Policy Initiatives
In January 2024, Senate Democrats introduced two bills: Preventing Algorithmic Collusion Act sponsored by Senator Amy Klobuchar (D-MN) and Preventing the Algorithmic Facilitation of Rental Housing Cartels Act sponsored by Senator Ron Wyden (D-OR).
The bills aim to prevent companies (notably property owners) from contracting services that coordinate prices (notably rent prices) and supply proprietary information by designating such arrangements as a per se violation of the Sherman Antitrust Act.
In Colorado, a similar bill is proposed to ban landlords from using certain algorithmic pricing systems to set rents.
The Senate proposals reflect the Biden administration’s tougher stance and stricter enforcement against anticompetitive behavior.
There is no meaningful bipartisan support for these two bills and with the upcoming 2024 election, any legislation on Capitol Hill at the moment is uncertain.
Legally, the bills also have some serious flaws. First, the current challenge with pricing algorithms is not the result of the lack of law, but the result of imperfect enforcement. There are existing antitrust laws. Second, the language of the law is vague, open to uncertainty, and a broad range of interpretations. Third, the vigilant and blanket stance against a new piece of technology overlooks the pro-competitive prospect of the technology. Pricing algorithms, if properly used and regulated, can increase efficiency in the market.
Some landlord defendants in the Tennesee suit have dropped from the suit because they don’t use nonpublic data in the agreement with RealPage. Moving forward, other property management companies may specifically contract with software providers to use only proprietary data and limit their exposure to legal risk.
However, pricing algorithms are here to stay and the real estate market continues to concentrate with the help of technology. Currently, the real estate market at large remains a decentralized market where small property owners make up the majority of landlords and only a small proportion of rent prices is the product of pricing algorithms. In the long run, well-financed large property owners who use pricing algorithms can still legally increase their operating efficiency and garner greater market share.
*The views expressed in this article do not represent the views of Santa Clara University.