Housing is the heart of the American political economy. Renting is often a stopgap to homeownership, with countless Americans traversing this path before securing a place of their own. But as millions of tenants pay more of their income in rent than ever before, the promise of an affordable alternative to homeownership has dissipated. Solving unaffordability and restoring the American dream means understanding the root cause of these high prices.
Today’s high housing costs reflect an anticompetitive and distorted market. The structure and business practices guiding the rental housing market essentially guarantee that prices won’t fall even if cities across the country deregulate their zoning codes and allow the market to work its magic. Consolidated ownership of rental housing units, combined with coordinated business strategies, means that the largest property owners and managers in local markets are collaborating with each other rather than competing against one another. As long as firms own enough housing to wield market power by restricting supply and fixing prices, rents won’t drop. Antitrust policy offers a potential way forward.
Reorienting Rental Housing Economics
Attempts to explain the affordable housing crisis beat the same dead horse. The loudest voices in the policy world invoke neoclassical economic theory and the so-called ‘laws of supply and demand’ to explain high housing costs. According to this theory, price is the outcome of a clash between what people want (demand) and what is available (supply). Ardent supporters of this explanation blame state regulations like zoning for inhibiting supply and leading to high prices.
However, evidence indicates this thinking is flawed. In a new working paper from the Federal Reserve Bank of San Francisco, researchers find that “housing supply constraints are quantitatively unimportant in explaining rising housing costs across U.S. cities.” Rents are relatively inelastic, which means prices don’t budge with increases in supply or low demand. Despite growing empirical evidence that casts doubt on deregulation as a panacea to high prices, neoclassical economic proponents continue to apply the logic of widgets to the places where people live.
Instead, we should think about rental housing prices like airline tickets. The similarities are plentiful, mainly because modern pricing models for rental housing originate from business strategies developed by the airline industry. Where airline tickets are segmented and pre-priced by cabin and row, prospective renters scour a limited selection of floor plans leased at fixed prices. Tenants are tacked with junk fees and hidden costs. Things like trash removal services at an apartment complex or selecting your seat on an airplane, both of which were once included in the price, have now become non-negotiable add-ons. Just as airline tickets are priced by which part of the cabin you’re located in, what day and time you want to travel, how close to the window you want to be, and where you’re going, rental housing supply is carved up by location, grouped into categories by floor plans, and released in limited quantities so the market is never oversupplied.
And like the airline industry, where ownership is increasingly concentrated and competitors collude to set prices, in housing markets, the consolidated ownership and coordinated practices of property owners and managers worsen these pervasive business strategies. Large financial firms and corporate landlords have built massive holdings in the multifamily, single-family, student housing, and manufactured home markets, securing market power over local housing stock. Lines between these firms have blurred because many of these financialized landlords are entangled with each other through joint ventures, partnerships, and minority stakes in portfolios.
With no rivals to undercut, a handful of big corporate landlords have gained pricing power over renters. All of this occurs with little consequence for the firms hoarding market power. Housing prices are high because the law allows them to be.
New Landlord Practices Manipulate Supply and Price
The economics of the rental housing market isn’t the only thing that has radically changed; the business practices of being a landlord are also much altered. Open markets rely on competition. In the rental housing industry, property owners and managers have historically competed against each other by pursuing a business strategy known as ‘heads in beds.’ The aim is to maximize profit by maximizing occupancy. To do that, an individual property owner or manager guesses a price level they think will capture as many potential tenants as possible at the highest rent they are willing to pay. Because vacancy is the enemy of this model, property owners and managers are encouraged to undercut their prices to pull tenants away from their rivals and push vacancies onto their competitors. Consolidation disrupts this competitive spirit.
Departing from ‘heads in beds’ and towards ‘revenue management,’ property owners and managers are now working together to maximize profit by manipulating supply. Under the ‘revenue management’ model, landlords divide their inventory into micro-markets to create a fixed supply, which they then sell at multiple price points. Imagine that within the same apartment building, two 2-bedroom units would be considered different products because the kitchen in one is located on the east side of the unit, while the other has its kitchen on the west side. Differences in layout, such as these, may command an additional $50 per month in rent.
To better understand how this works in housing markets, consider an example from the airline industry. Recall the last time you purchased plane tickets. Seeing red lettering that “only 2 seats are left at this price,” you probably scrambled to scoop up the cheapest tickets. Your purchase of the tickets doesn’t mean the flight has sold out; it means the tickets reserved for sale at that price have sold out. Once the limited number of the lowest-priced tickets sells out, future customers are redirected to the more expensive options for the same flight. As the departure dates nears or demand surges, tickets will become even more costly. Irregular and unstable prices— ‘dynamic pricing’—means that prices can fluctuate daily and almost only ever move upwards.
Corporate landlords and property managers are also using the same playbook to artificially restrict and dynamically price leases utilizing an aspect of revenue management called ‘lease expiration management.’ In effect, this practice aims to keep supply low and landlords in a position of pricing power by analyzing when leases for similar properties in the same geography are expiring. By recommending price changes and new lease terms to potential renters, expiring leases are sequenced so that there is never a glut of supply hitting the market and threatening to lower prices at once.
It is no surprise that the corporate landlords and property managers controlling supply also work to control prices. Would-be competitors act in concert to maintain high prices with algorithmic price-setting software. Rather than competing for tenants with lower rents or better quality housing, such software allows corporate landlords and property managers to collude, conspire, and coordinate prices to optimize and maximize profits across a given geography.
Users of rent-setting software commit to maintaining the alleged cartel by sharing nonpublic transactional information—private data on prices and leases that would have otherwise given a landlord or property manager a competitive advantage over their rivals—with the platform and, by extension, with each other. Swapping information with their competitors and accepting the price recommendations of the algorithmic middleman “ensure[s] that [landlords’] are driving every possible opportunity to increase price in the most downward trending or unexpected conditions.” Or, as these companies like to promise, a rising tide lifts all boats.
Antitrust Regulation Offers a Solution
Of course, renters are shouldering the burden of the new economics and practices of rental housing. Economists estimate tenants overpay upwards of $70 per month to live in algorithm-utilizing properties, costing American renters at least $3.8 billion in 2023 alone. The scale and scope of this problem is significant. Over the last decade, 82% of rental housing constructed in the US has come in the form of large apartment buildings with 20 or more units. Big buildings such as these account for nearly all the properties that use algorithmic price-setting software. And as recent reporting indicates, contemporary pricing practices harm most renters in most US markets.
To restore the American dream for the American people, we must recognize the high price of housing for what it is: an antitrust issue. Bipartisan efforts to regulate high housing prices through antitrust law are taking hold at the local, state, and federal levels. Not only is the Department of Justice seeking to halt algorithmic-enabled price-fixing among property owners and managers, but state attorneys general are also doing so. Cities like San Francisco and Philadelphia have banned the use of revenue management software in rental housing.
Curbing these kinds of anticompetitive business practices is important, but more can be done. Antitrust regulation needs to prevent housing monopolies from forming by addressing the structure of housing markets. First and foremost, regulators need to close Section 802.5 of the Hart-Scott-Rodino Act—a loophole in competition law—which exempts rental housing mergers and acquisitions from antitrust review. A push from the US Senate Subcommittee on Antitrust, Competition Policy, and Consumer Rights is the first step in the right direction. Reviewing and subsequently blocking anticompetitive mergers between the largest corporate landlords and financial firms, like recent efforts in the airline industry, can help restore competition. State and local competition laws could be similarly revamped to account for the reality of today’s housing markets.
Second, concentrated ownership of housing in the hands of a few is a problem. Federal, state, and local regulators can limit the number of units large firms can amass within a geographic market. Preventing a single firm from acquiring a dominant market share dilutes pricing power in multifamily rental markets, gives tenants more choice in who they rent from and where they live, and returns single-family rentals from the hands of investors into the hands of first-time homebuyers.
Third, renters need the right to access the courts to file antitrust grievances. Corporate landlords and property managers that use algorithmic price-setting software require tenants to sign arbitration agreements and class action waivers before taking residence. These contracts allow landlords to circumvent the judicial system with mandatory arbitration, even though high costs and anticompetitive conduct don’t just harm a single renter—they hurt and distort an entire market. Collective action is critical to remedying the problem.
However, like in the airline industry, competition policy alone won’t counter the harms of a deregulated housing market. Price caps and reformed tenant-landlord laws are also essential in building a rental housing market that is an affordable alternative to homeownership. Taken together, what the American housing market needs is more regulation, not less. We should be skeptical of policies that suggest otherwise.
