The Department of Justice (DOJ) has recently filed a high-stakes lawsuit against RealPage Inc., a software company accused of facilitating a nationwide conspiracy among major landlords to fix rent prices. This lawsuit, which has been joined by attorneys general from eight states, alleges that RealPage’s software enabled landlords to collude on rent pricing, artificially inflating rental costs across the country. While the focus of the lawsuit is on antitrust violations, the implications for the broader housing market could be profound, potentially setting the stage for a housing price crash that some experts have been predicting.

How the Alleged Conspiracy Worked

According to the DOJ’s complaint, RealPage’s software, particularly its revenue management service YieldStar, played a crucial role in allowing landlords to share sensitive pricing information and coordinate rent increases. The software’s algorithm is designed to analyze rental data from competing landlords and recommend pricing strategies that maximize rent. This practice allegedly reduced competition among landlords and kept rental prices artificially high. With approximately 80% of the market for such software, RealPage’s tools are said to have influenced the prices of around three million rental units nationwide.

The Potential Impact on the Housing Market

The housing market is intricately linked to the rental market, with rent prices serving as a critical factor in determining the attractiveness of homeownership versus renting. Historically, the housing price-rent ratio has been a key indicator of economic health. A high ratio suggests that home prices are inflated relative to rents, which can lead to a cooling housing market as more people opt to rent rather than buy. The current lawsuit could disrupt this delicate balance.

If the DOJ succeeds in proving that RealPage and the landlords using its software artificially inflated rents, it could lead to a significant drop in rental prices as the market adjusts to more competitive conditions. A decline in rents would likely make renting a more attractive option for many, reducing the demand for home purchases. This shift in demand could cause home prices to stagnate or even decline, particularly in markets where rental rates have been a driving factor in home price appreciation. In addition if rents drop the attractiveness of rental units to investors will suddenly turn rentals into homes on the market further depressing real estate values.

A Precursor to a Housing Market Correction?

The housing price-rent ratio has been a reliable indicator of economic downturns in the past. For example, leading up to the Great Recession, the ratio peaked in 2006, signaling an overheated housing market. While the ratio isn’t always a perfect predictor of recessions, it has correctly indicated major downturns, such as the 1980 and 2007 recessions. If rental prices drop significantly due to the DOJ’s actions, the housing price-rent ratio could rise once again, potentially signaling another impending correction in the housing market.

Broader Economic Implications

A significant drop in home prices could have ripple effects throughout the economy. Home equity is a major source of wealth for many Americans, and a decline in home values could reduce consumer spending, weaken financial markets, and potentially trigger a broader economic slowdown. Moreover, the Biden administration, which is already grappling with inflation concerns and high living costs, could face additional economic challenges if the housing market begins to contract.

Political Ramifications

The timing of the DOJ’s lawsuit is politically charged. The Biden administration is under pressure to address the rising cost of living, with housing affordability being a central issue. Vice President Kamala Harris has made housing costs a key focus of her presidential campaign, pledging to tackle corporate landlords and cap unfair rent increases. The administration’s decision to pursue this lawsuit against RealPage could be seen as an effort to deliver on those promises. However, if the lawsuit leads to a housing market crash, it could have unintended consequences for the economy and for voters’ perceptions of the administration’s handling of the economy.

RealPage’s Defense and the Legal Battle Ahead

RealPage has denied the allegations, arguing that its software is pro-competitive and has been used responsibly for years. The company also pointed out that the DOJ had previously reviewed its acquisition of a competing software provider without raising objections. RealPage maintains that its market share in any given city is relatively small and that landlords frequently reject its rental recommendations.

The outcome of this legal battle is far from certain, but the stakes are high. If the DOJ prevails, it could lead to significant changes in how rental prices are set across the country, with potential repercussions for both the rental and housing markets.

The Beginning of the End for the Housing Boom?

The DOJ’s lawsuit against RealPage could be the catalyst that triggers the housing market correction that many have been anticipating. As rental prices potentially fall and the housing price-rent ratio adjusts, the market could experience a shift that leads to declining home prices. While it’s too early to predict the full impact, this case could mark the beginning of the end for the housing boom that has characterized the post-pandemic economy. Whether this leads to a controlled correction or a full-blown crash remains to be seen, but the stakes for homeowners, renters, and the broader economy are undeniably high.