3 ms·

The exact number of landlords doesn't quite matter here, as long as enough of them are using the algorithm. One of the cases specifically being looked at in th

The exact number of landlords doesn't quite matter here, as long as enough of them are using the algorithm. One of the cases specifically being looked at in this investigation is Washington D.C. Google tells me that around 60% of rentals in D.C. are in large apartment buildings, but that's just a quick search so take that with a grain of salt. ProPublica says that 90% of these apartments are using the software. If we accept these numbers are close, and knowing that 90% of buildings doesn't necessarily mean 90% of all apartments, we can guess that means somewhere around 50% of all rental properties in D.C. are priced using this software. The number might be higher, since I don't know if any non-apartment buildings are using this software, or it might be lower if the data is inaccurate. So yes, the remaining 50% of the market could undercut the 50% using the software. However, it's still possible for 50% to have an effect on the housing market. This is because the housing market is generally considered to be inelastic and because it is difficult to increase supply quickly. Compare it to, for example, soda, which is an elastic market with a lot of production. If Coke and Pepsi lost their minds and started charging $100 for an 8 oz can, they're creating a lot of potential for other companies to undercut them at, say $2 a can. As long as $2/can is profitable, they can win Coke and Pepsi's market from them overnight. If 50% of rental properties started renting for $1 million/week, obviously, very few people can afford that, and I doubt anyone would pay it. But what could the other 50% of the market do? They could keep their rates lower, but all the rentals will fill up. Again, numbers are hard to find, but vacancies in D.C. are probably around 6%, so prospective renters will play musical chairs for the 50% of rental properties that have more reasonable rents. There's a potential here for companies to build new properties and undercut the 50%, but building is lengthy, expensive, requires permitting, etc. The market can't respond very quickly, and because new construction tends to be expensive, rents from new buildings tend to be higher.

lazide 3y ago
Very good points! And yes, I can see what you’re talking about rent movement wise. The challenge though is that at least the Fed data doesn’t seem to support it across the industry, at least as far as I can tell. Rents seem to be moving in almost lockstep with inflation (and fed rates?), and have been since before COVID started. Which is odd in itself, actually, and I think might support the case of ‘have to raise rents or our financing will collapse and we’ll go insolvent’. I’m wondering if these large complex vacancies are inversely correlated? If so, seems like an opportunity to short something somewhere. I’d argue there is a third market option here too. While someone can quit drinking soda, they can’t quit having a roof over their heads. Well, technically they can and increasing homelessness is proof of that - but that is a very extreme option with incredibly high costs, so we’ll ignore that for now. But if remote work is an option, or if the local salaries don’t support the higher rents, people can and will move, or double up, or sublet, etc. Or just go bankrupt, and be out of the ‘renter’ pool that way. The inflexibility of real estate does mean it takes time for all this to play out, but in your $1 million/wk option, the inevitable outcomes here seem to be: 1) the apartments keep that crazy price, have zero (or near zero - until the few crazy renters went bankrupt) renters, and eventually go bankrupt themselves. Since even if they have a cash cushion, that cushion will run out eventually. High financing costs mean they’ll even be unable to get business loans to cover cashflow issues, which would typically give them more breathing room. And since local renters don’t make enough to pay that rent anyway ($52/mil a year on rent is hard to pay), and even hotels or SFH rentals would be dramatically cheaper. Why would Jeff Bezos want to rent one of these, after all, and he’d be one of the few would could? or 2) have legislation passed which outlaws what they are doing by setting rent caps or the like (and there would be plenty of support). or 3) have their properties burned to the ground by pitchfork wielding mobs. Possibly all 3 at the same time? Alternatively, what I think they’re all hoping for, is that income inflation for renters means renters will be willing and able to pay these higher rates, and they’ll be saved by a post-COVID boom and everyone will actually be - at worst - moderately grumpy. Which may happen!
- StewardMcOy 3y ago
  Agreed. That is indeed what may happen. I'm definitely happy for the federal government to investigate the impact of these algorithms in cities with the fastest range of rent growth, however. It makes sense to ban it federally even if it's only really stopping price fixing in one or two cities. To be clear, the million dollar scenario was intended as one in which the landlords collectively lost their minds and plunged themselves into long-term economic doom. In a more realistic pricing scenario, they'd collude to determine the absolute maximum price they could charge and still get tenants. And when you think about it, that's how markets are supposed to work. Landlords want to charge as much as the market can bear, no more, no less. Renters want to pay as little as possible, and in a perfect market, it would reach price equilibrium. But from the federal government's point of view, it's not as simple. Housing must be profitable in order to encourage new investment in housing. We're currently playing musical chairs with too few residential units for too many residents because there hasn't been enough housing investment since the 2008 crash. At the same time, they want to keep rents low, since money spent on rent isn't going into productive areas of the economy. They also want to keep rents variable, because strictly stratifying locations based in income has bad effects in society. (E.g. police officers not being able to afford to live in the large cities they work in.) Retaining the ability for lower-income renters to negotiate rent is helpful in that regard, but obviously not a silver bullet. One thing I would be careful of though, is comparing rental prices to inflation. Housing costs are the single largest factor in the CPI-U, so it's almost a tautology that rents rise at the same rate of inflation, because inflation is largely measuring the rate at which rents rise. Comparing to fed rates is more interesting. If you're getting less of a return on your investment than the current fed rate, you'll make more money by divesting yourself of your properties and putting the money into bonds. (And I believe this is the biggest driver of recent mass layoffs.)

lazide 3y ago

Very good points! And yes, I can see what you’re talking about rent movement wise. The challenge though is that at least the Fed data doesn’t seem to support it across the industry, at least as far as I can tell. Rents seem to be moving in almost lockstep with inflation (and fed rates?), and have been since before COVID started. Which is odd in itself, actually, and I think might support the case of ‘have to raise rents or our financing will collapse and we’ll go insolvent’. I’m wondering if these large complex vacancies are inversely correlated? If so, seems like an opportunity to short something somewhere. I’d argue there is a third market option here too. While someone can quit drinking soda, they can’t quit having a roof over their heads. Well, technically they can and increasing homelessness is proof of that - but that is a very extreme option with incredibly high costs, so we’ll ignore that for now. But if remote work is an option, or if the local salaries don’t support the higher rents, people can and will move, or double up, or sublet, etc. Or just go bankrupt, and be out of the ‘renter’ pool that way. The inflexibility of real estate does mean it takes time for all this to play out, but in your $1 million/wk option, the inevitable outcomes here seem to be: 1) the apartments keep that crazy price, have zero (or near zero - until the few crazy renters went bankrupt) renters, and eventually go bankrupt themselves. Since even if they have a cash cushion, that cushion will run out eventually. High financing costs mean they’ll even be unable to get business loans to cover cashflow issues, which would typically give them more breathing room. And since local renters don’t make enough to pay that rent anyway ($52/mil a year on rent is hard to pay), and even hotels or SFH rentals would be dramatically cheaper. Why would Jeff Bezos want to rent one of these, after all, and he’d be one of the few would could? or 2) have legislation passed which outlaws what they are doing by setting rent caps or the like (and there would be plenty of support). or 3) have their properties burned to the ground by pitchfork wielding mobs. Possibly all 3 at the same time? Alternatively, what I think they’re all hoping for, is that income inflation for renters means renters will be willing and able to pay these higher rates, and they’ll be saved by a post-COVID boom and everyone will actually be - at worst - moderately grumpy. Which may happen!

StewardMcOy 3y ago
Agreed. That is indeed what may happen. I'm definitely happy for the federal government to investigate the impact of these algorithms in cities with the fastest range of rent growth, however. It makes sense to ban it federally even if it's only really stopping price fixing in one or two cities. To be clear, the million dollar scenario was intended as one in which the landlords collectively lost their minds and plunged themselves into long-term economic doom. In a more realistic pricing scenario, they'd collude to determine the absolute maximum price they could charge and still get tenants. And when you think about it, that's how markets are supposed to work. Landlords want to charge as much as the market can bear, no more, no less. Renters want to pay as little as possible, and in a perfect market, it would reach price equilibrium. But from the federal government's point of view, it's not as simple. Housing must be profitable in order to encourage new investment in housing. We're currently playing musical chairs with too few residential units for too many residents because there hasn't been enough housing investment since the 2008 crash. At the same time, they want to keep rents low, since money spent on rent isn't going into productive areas of the economy. They also want to keep rents variable, because strictly stratifying locations based in income has bad effects in society. (E.g. police officers not being able to afford to live in the large cities they work in.) Retaining the ability for lower-income renters to negotiate rent is helpful in that regard, but obviously not a silver bullet. One thing I would be careful of though, is comparing rental prices to inflation. Housing costs are the single largest factor in the CPI-U, so it's almost a tautology that rents rise at the same rate of inflation, because inflation is largely measuring the rate at which rents rise. Comparing to fed rates is more interesting. If you're getting less of a return on your investment than the current fed rate, you'll make more money by divesting yourself of your properties and putting the money into bonds. (And I believe this is the biggest driver of recent mass layoffs.)