* Posts by Autolycos

2 publicly visible posts • joined 25 Aug 2024

Feds, US states sue RealPage for building rent-hiking software for landlords

Autolycos

Re: landlords are colluding to raise prices by using software developed by RealPage

Just a reminder... The Federal Trade Commission defines price-fixing as "an agreement (written, verbal or inferred from conduct) among competitors to raise, lower, maintain, or stabilize prices or price levels. Generally, the antitrust laws require that each company establish prices and other competitive terms on its own, without agreeing with a competitor. When purchasers make choices about what producs and services to buy, they expect that the price has been determined on the basis of supply and demand, not by an agreement among competitors. When competitors agree to restrict competition, the result is often higher prices."

"Often"???? Why else would they do that?

In any case, it seems there was a time when the rent was agreed upon by the landlord and the prospective renter, similar to the way the purchase price of a house is still done. As I point out above, the fact that HUD sets specific rent rates that it will subsidize for Section 8 housing, may have given rise to the practice of setting a non-negotiable "market" rate for rentals... which of course isn't "market" at all, especially since supply can be manipulated !

Autolycos
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Fair Market Rents Wag the Dog

This issue has been known for some time, yet until recently it apparently has sunk beneath the waves of complacency and “business as usual.” In February, 2024 Senator Peter Welch (D-Vt.) and Senator Ron Wyden (D-Ore.) introduced a bill, “Preventing Algorithmic Facilitation of Rental Housing Cartels” that would “prohibit digital price-fixing by landlords.” Rep. Becca Balint (D-Vt.) and Rep. Jesús “Chuy” Garcia (D-Ill.) sponsored a House bill of the same name.

An in-depth probe by Pro Publica (posted Oct. 15, 2022), showed the algorithm is not nearly as objective at setting rental rates as its originators claim. Pro Publica investigated RealPage out of Texas, which “provides property management software, data analytics, and services to efficiently manage rental properties and real estate,” according to RealPage.com.

As a society, we risk being lulled into an unquestioning faith in technology to “make life easier” by providing shortcuts. But Pro Publica also found that RealPage in fact gathers rent data from “clients, including private information on what nearby competitors charge.” Pro Publica’s inside sources said that the algorithm gets around the “temptation” to negotiate rental rates with tenants. One of the architects of the software, Jeffrey Roper, told Pro Publica, “There’s way too much empathy going on here. This is one of the reasons we wanted to get the pricing off-site. … If you have idiots undervaluing, it costs the whole system.”

Amid the urgency to provide “affordable” housing, the LIHTC (Low Income Housing Tax Credit) has become very attractive to affordable-housing investors. It’s troubling to learn from RealPage’s website that RealPage Compliance Services provides services for affordable housing programs, including the LIHTC (Low Income Housing Tax Credit).

Novogradac, a resource center for tax credit information and affordable housing, explains that “The LIHTC gives investors a dollar-for-dollar reduction in their federal tax liability in exchange for providing financing to develop affordable rental housing.” (Novoco.com)

That is a large carrot, and big tax windfall, in return for a promise to keep rents in those projects “permanently affordable.” And if it sounds too good to be true, it is.

Moreover, as Shelterforce explains, the LIHTC agreements don’t go on forever. The affordability requirement is for the project itself – not the renter – and ends in Year 30. This means that buildings built with the LIHTC in the mid-1990s are about to convert back to market rates. In this climate of extreme rent inflation, the future does not look good for preserving affordable housing. (Shelterforce: Essential Reporting on Affordable Housing, #135, May/June 2004)

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Manipulating rental rates can influence not only open market rates but also the landscape for affordable housing. The federal government sets what it calls Fair Market Rent. But there is nothing inherently fair to the renter about “fair market rent.”

“[Fair Market Rents], regularly published by HUD, represent the cost to rent a moderately-priced dwelling unit in the local housing market,” explains Huduser.gov. HUD defines fair market rents as “an estimate of the amount of money that would cover gross rents (rent and utility expenses) on 40 percent of the rental housing units in an area.”

But HUD’s “fair market rent” figures are derived from several sources, which all come down to the projected market rent for a given area. … as well as median income figures.

Announcing the 2024 increase of 12% in fair market rents, a Q&A page acknowledges that HUD relies on the real estate industry to provide the most up-to-date data, while analyzing (already outdated) 5-year results from the American Community Survey conducted by the U.S. Census Bureau. In ACS, households are contacted directly for information. But HUD also consults private sector rental data from multiple sources into the FMR calculation process in limited and statistically valid situations where private sector rental data have demonstrated that they more accurately estimate changes in rental markets.”

HUD also consults Moody’s Analytics, CoStar Group “average effective rent,” CoreLogic, Apartment List rent estimates, and Zillow. In this writer’s opinion, RealPage and Zillow have a vested interest in increasing rents, as they both serve landlords and real estate managers. HUD claims that it must raise the fair market rent to more closely compete with market rents, in order to overcome landlords’ reluctance to accept Section 8’s traditionally lower rates. (hud.gov/sites/dfiles/PA/documents/FMR_FAQs.pdf)

One dataset that factors into the HUD “fair market rent” calculation is median income, since the benchmark for affordability is 30% of income, set by Congress in the 1980s. [huduser.gov/portal/datasets/fmr/fmr2024/FY2024_FMR_Schedule.pdf] lists “fair market rents” for metropolitan and non-metropolitan areas, county by county, from Alabama to the Virgin Islands.

In Vermont, for example, now in the top 5 states for cost of living, HUD gives the current household median income for the state of Vermont as $102,300. This [huduser.gov/portal/datasets/il/il24/FY24-Median-Attachment-State-Medians.pdf]

Vermont Housing Finance Agency (VHFA) publishes a rubric that shows the metro median income is $118,900, inflated by the concentration of high-earning professionals in the greater Burlington area. A household earning 100% of median income, or $83,300, would pay a maximum gross rent of $2,677 for a 2-bedroom apartment. [housingdata.org/documents/purchase-price-and-rent-affordability.pdf]

The non-metro median household income is $95,000. The rent on a two-bedroom unit for a 100% non-metro median income of $95,000 is $2,302. On the low end of the spectrum, a household of one with an income of $21,500 (30% of median) can “afford” a maximum gross rent of $576 for a 1-bedroom apartment, while a renter with an income of $35,850 (50% of median) can “afford” $960 for the same apartment.

While the site cautions that the data have “no statutory enforcement power,” and the “fair market rent” sets a ceiling for the Section 8 program, the rubric more than suggests a baseline for market-rate rents in general. A look around the state of Vermont shows rent “ceilings” that are already beyond the reach of the ordinary Vermonter. And as median household incomes rise, inflated by Vermont’s campaign to attract more earners in the $200,000 range, so do HUD’s “fair market rents” based on median household income.

Investors have learned ways to game the rental housing supply, and government plays into their hands by pegging “fair market rents” to market rents reported by the industry itself.

When players such as RealPage gather data on prevailing rents in an area, they are also tapping the blanket rental rates set by HUD as their baseline. If HUD’s “fair market rent” stands for 40% of rental rates gathered county by county across the nation, and if those rates being charged in real time by landlords through their property managers are converted into software that investors can utilize sight-unseen, the tail is wagging the dog.