This article was originally published in Harvard Business Review
By Brian Callaci and Sandeep Vaheesan
Summary. Unaffordable housing is a drag on regional and national economies. In areas where housing costs are high, employers end up effectively transferring significant sums to landlords as the cost of attracting talent. But what will it take to fix this problem? Will market-based solutions suffice? If not, what kinds of interventions are necessary? Recent research shows that the market itself needs to be fixed. Any plan to overhaul the housing market needs to, first, confront the power of landlords to raise rents. Second, it requires rethinking public governance of housing markets behind simplistic prescriptions to just free the housing market from government regulation, assuming lower rents will follow. And third, it needs to provide more muscular government involvement in housing, through price regulation, more robust planning, and even direct public provision.
The United States is experiencing a serious housing crisis, and has been for a long time. Growth in rents continues to exceed overall price inflation. Mortgage rates have been at a multi-decade high due to the Federal Reserve’s aggressive rate hikes since summer 2022. Tens of millions of households spend more than 30% of their income on housing. Shelter is a basic human need and unaffordable housing is — and should be — a national scandal.
It is also an increasingly urgent concern for businesses. Unaffordable housing is a drag on regional and national economies. In areas where housing costs are high, employers end up effectively transferring significant sums to landlords as the cost of attracting talent. High rents and mortgage payments make hiring harder at all levels: Recent research has documented that high housing costs have eroded the urban wage premium for workers with fewer years of formal education. Now, these workers are better off moving to a city with lower cost of living rather than one that offers a higher wages.
In August, Vice President Kamala Harris announced that housing was one of the core features of her economic platform, a position she echoed in the September presidential debate. In a speech laying out her plan — the first major policy announcement of her candidacy for president — she introduced a goal of building 3 million new housing units, using tax credits to promote construction, to address the supply problem that has contributed to higher prices. But she also voiced support for policies that would ban setting rents with algorithmic pricing systems and introduce new regulations for corporate landlords. This follows the Biden-Harris administration’s plan to cap annual rent increases for large landlords at 5% over the next two years.
With this proposal, Harris has waded into a contentious fight over what’s really gone wrong with the U.S. housing market.
Economics 101 teaches that when prices of a good like housing rise, that acts as a signal to producers to supply more of that good. By this logic, if prices remain stubbornly high, something must be impeding the balancing of supply and demand, and when that obstacle is removed new supply will be produced and prices will go down. Many commentators and groups have argued a version of this story: The housing market can be repaired with the simple fix of liberalizing zoning rules and other public regulations allegedly strangling the supply of new homes, which they say will lead to an explosion in housing construction. Once the government gets out of the way, private actors will fix the problem themselves.
There’s another view, however, in which one underappreciated cause of runaway housing costs is the market power of developers and landlords — and more recently, software that allows them to leverage this power in unfair ways. The prime example of this is the recent Department of Justice lawsuit, joined by eight states, against the property management software company RealPage. The DOJ’s suit follows Arizona and the District of Columbia and class-action lawyers filing complaints against the platform. According to the lawsuits, RealPage coordinated with landlords in cities such as Atlanta, Boston, Phoenix, Seattle, and Washington, D.C. to prioritize higher rents and accept lower occupancy rates, with the understanding that their overall profits will be higher under this strategy.
These allegations show the limits of a “trust the market” approach to housing policy. Research from around the world shows that more permissive zoning rules do not, by themselves, lead to a major increase in housing supply, let alone more affordable housing. The truth is that the market itself needs to be fixed. Specifically, any plan to overhaul the housing market needs to, first, confront the power of landlords to raise rents. Second, it requires rethinking public governance of housing markets beyond simplistic prescriptions to just free the housing market from government regulation, assuming lower rents will follow. And third, to that end, we need more — not less — muscular government involvement in housing, through price regulation, more robust planning, and even direct public provision.
Power, Collusion, and a Broken Market
In an Econ 101 land, prices act as signals to market participants. In such a world, government regulations can only impede the functioning of price signals, preventing supply from matching demand. But that is not the world of the housing market. In particular, market participants in housing — notably landlords — have market power: the ability to raise prices above the so-called competitive level and hold back the supply of housing.
The recent story of rent-setting software companies illustrates just how this works, and why government intervention through antitrust and other measures is required, even if only to restore the “competitive conditions” envisioned by economists.
In dozens of cities, rental property managers and owners signed up for “revenue management” services from software companies, notably RealPage and its former competitor Lease Rent Options, which it acquired in 2017. These companies promised to apply algorithms powered by massive volumes of rent, occupancy, and other relevant data to help property managers and owners figure out how to boost profits. Landlords agreed to work with RealPage on the understanding that their competitors are doing so as well, and that if they collectively raise rents they all make more money.
This was classic collusion among rivals — the new tech should not obscure what’s being done. One class action filed against RealPage estimates that its property manager partners may control as many as 19.7 million rental units out of 22 million desirable, “investment grade” apartment units in the country. The federal and class action lawsuits allege that the company worked with landlords in practically every major city in the nation, including Atlanta, Boston, Dallas, Los Angeles, New York, Philadelphia, Seattle, St. Louis, and Washington, D.C. In Washington, D.C., RealPage allegedly priced 60% of units in large multifamily properties in the city and 90% in the broader metropolitan area.
RealPage’s recommendations persuaded landlords to change their pricing strategy, allege attorneys general of Arizona and District of Columbia and private plaintiffs’ lawyers and the latest suit by the Department of Justice and a group of eight states. Traditionally, property managers aim for full occupancy — an empty apartment generates no revenue but still incurs regular maintenance costs, and so property managers priced units to get as close to 100% occupancy as possible. But RealPage convinced landlords that they and their competitors could make more money if they raised rents together and accepted lower occupancy rates (e.g., an occupancy rate of 95% and a higher rent could yield greater profits than at an occupancy rate of 99% with lower rents). These recommendations were practically binding: The company terminated its relationship with landlords that rejected its recommended rents more than a small fraction of the time. If just 1% of nearly 20 million units sit unoccupied due to collusive pricing, that means almost 200,000 rental properties are empty across the United States.
The adoption of RealPage software appears correlated with significant rent increases. Recent economic research has found that landlords using the software were able to increase rent markups by $53 per unit per month. According to the consumer class action noted earlier, rents increased substantially following the adoption of RealPage pricing by a critical mass of landlords in 2016. In Phoenix and Sacramento, rent hikes were especially pronounced, with landlords raising rents 76% and 68%, respectively, between 2016 and 2023.
This is just part of the larger story of the housing crisis, but it exposes the tension that any solution must address: Left to their own devices, profit-motivated landlords will not provide the quantity of housing needed to meet the supply shortage. Rather, they will undertake the profit-maximizing strategy of colluding with each other to raise rents and hold back supply. At a minimum, antitrust enforcement and a ban on algorithmic rent-setting is required. But enabling more competition along the lines of what’s described in Econ 101 textbooks isn’t enough, because there’s little evidence that private developers alone will — or can — provide enough housing to fix this crisis.
What the Private Sector Can — and Can’t — Do
According to proponents of simple “market-based” solutions, relying on the profit motive is a central feature of fixing housing. Some of aspects of the Biden-Harris administration’s housing policy — such as the 5% rent cap — intervene directly in the cost of housing. But other proposals, such as Harris’s plan to provide and expand incentives to developers to build more starter and rental homes or her proposal to provide assistance to first-time home buyers, seek to entice private actors to expand supply by using public money to boost their bottom lines. While nudging developers and landlords with incentives can marginally increase the supply of housing, they ultimately rest on a “trust the market” strategy that has to date failed to solve the problem.
The most extreme version of “trust the market” housing policy is the common refrain — popularly associated with the “Yes in My Backyard” (or YIMBY) cause — that zoning rules are a primary, if not the primary, cause of the present housing crisis. YIMBYs call for the reform or abolition of zoning rules that prevent construction of duplexes, triplexes, and other multi-family housing, along with rules on minimum lot sizes and parking requirements. This cause is commonly captured in the slogan “legalize housing.” The idea is to get out of the market’s way and let the drive for profit solve the problem.
Profit considerations, however, mean that more liberal zoning rules are at most necessary, but not sufficient, to increase the supply of housing. Just because private developers can build housing does not mean they will. Liberalization of zoning regulations appears to increase the supply of housing, but the effect is rather modest. Summarizing the findings of a co-authored paper, Yonah Freemark of the Urban Institute — a leading researcher on land-use reforms — told an interviewer, “[W]e found the average upzoning would result in a 0.8% increase in housing supply in the short- to medium-term after the change, three to nine years after the upzoning.” That is not nothing, but hardly lends strong support to the cause of zoning reform.
The problem, generally, is that building housing is just one way to profit from a piece of land, and zoning reform tends to increase land values. The price of an asset, including land, is its discounted future profit streams. So, if land with a three-unit apartment building today is upzoned for mixed-use developments, that widens its range of possible uses and raises expected profits, making it more expensive today. In many places, expectations of inadequate profits — not zoning — appear to be the primary constraint on further housing construction by the private sector, as profit-motivated corporations are reluctant to build. Developers sometimes acquire and “bank” tracts of land for the future and develop them when expected profits are higher. Alternatively, they may build luxury units and focus their efforts on the affluent. The large-scale acquisition of single- and multi-family housing by asset managers like Blackstone, which promise outsized returns to their investors in a short period of time, has only supercharged the role of profits in the provisioning of housing.
Upzoning alone is also a contributor to displacement. Higher land values are a good outcome for current landowners, but not for their tenants. While wealthy, white suburban communities are often the public face of opposition to zoning reform, the adverse effects of upzoning also fall on poor and working class Black and brown communities where most residents and business proprietors rent. In major metropolitan areas, tight-knit communities with a mix of residential, commercial, and light industrial activities have been disrupted by zoning reform. With the lure of higher land prices, property owners evicted current tenants and sold their plots to developers, pocketing a tidy windfall.
In these cases, upzoning did not produce affordable housing or even a net addition of housing. Instead, it resulted in the replacement of older residential buildings and small businesses with higher-end apartments, condominiums, restaurants, and retail. Families and business proprietors who had lived and worked in one place for decades were forced to uproot and resettle, losing their strong economic and social networks. Communities became wealthier and whiter in the process.
Public Regulation, Planning, and Provisioning
Housing, like healthcare, telecommunications, and energy, may be an example of an industry in which corporations should support stronger public governance due to their own private interest. After all, since every worker needs to be housed, and employers ultimately foot much of the bill for housing their workforce through the wage bill, major employers can help push for policies to solve the housing crisis. Unfortunately, while some employers have become aware of their self-interest in solving the housing crisis, they have been slow to support public solutions to soaring housing costs.
In this, they unfortunately follow in the footsteps of their 20th century predecessors. Indeed, it was not employers but New York City garment unions who in the 1920s pushed for legislation to enable them to build — with pooled worker funds and loans — the large-scale cooperative housing complexes for the industry’s labor force. These profit-capped co-operatives became the model for limited-equity housing co-ops that are a current staple of dense, stable, and vibrant New York City neighborhoods.
Freeing the market through zoning reform alone is not likely to fix America’s housing woes. By contrast, public governance of and direct participation in housing markets can make affordable and decent shelter a universal reality. This requires a three-part program of stronger public governance of housing markets; local, regional, and federal planning; and social housing.
Stronger Public Governance
First, the federal government, states, and private plaintiffs’ bar must vigorously enforce the antitrust laws against real estate entities. Landlords can collude to raise their profits, and new technology is helping them solve longstanding coordination problems. RealPage is a testament to that, and the scale and scope of the conspiracy suggests antitrust enforcement, at present, fails to deter even blatantly illegal conduct.
But collusion is hardly the entire story. Antitrust and other laws against unfair business conduct should be used to stop myriad restrictive practices in housing and land markets.
Recent research indicates that individual landlords have a degree of monopoly power, due to frictions in the housing market making it costly for tenants to leave their current housing and find a new place to live. RealPage’s rich data may have educated landlords about the extent of their own market power, teaching them they can raise rents by more than they previously thought possible.
Private home and community developers have long imposed restrictive covenants, which bar purchasers and all future owners from certain uses. Millions of homes are subject to these restrictions, often put in place by developers to attract buyers that want to live in whiter and wealthier communities. In 1948, the Supreme Court ruled that restrictive covenants prohibiting residence based on race or ethnicity cannot be enforced through legal action, and Congress outlawed them in the Fair Housing Act. But other restrictions are still commonly used and enforced, including ones that prevent the construction of multifamily housing, establish minimum lot sizes, and even restrict non-traditional households from living in a neighborhood. Often enforced by private homeowners’ associations, these covenants function as a form of private zoning, but enacted without public input.
Some of the policy tools are already being used and familiar to the public: Rent-stabilization laws and other tenant protections are important. Given that housing is an essential need and tenants are often in a vulnerable position, landlords have substantial power individually and as a class. Second-generation rent-control laws do not freeze rents but rather generally prevent landlords from raising rents more than the local or regional rate of overall inflation, for instance. They restrain the unilateral and collective price-setting power of landlords and can mitigate the long-term effects of the RealPage cartel described above. (Extensive empirical research shows that the simplistic story of such rent control leading to less and poorer quality rental housing is false.) Similarly, tenants should have just-cause protections that allow evictions only for causes stipulated in the law, such as a failure to pay rent or intentional damage to rental property. In addition to protecting tenants from abusive landlord conduct, these laws can promote housing and community stability as tenants can stay in one place for a longer period.
Public Planning
State, regional, and local governments must engage in public planning. At a minimum, this planning is necessary for building roads, public transit, schools, and other infrastructure needed to support expansion of the housing supply. Uncoordinated housing construction can lead to traffic congestion and overburdened bus, rail, and school systems and even inadequate water supply and sewerage capacity. Further, planning can mitigate the harmful effects of upzoning done in isolation. It can promote economically and racially diverse communities and prevent mass displacement following upzoning.
When upzoning land, some cities try to capture a portion of the increased value through public benefits agreements. For example, as part of the redevelopment of the Gowanus neighborhood in Brooklyn, residents and businesses established the Gowanus Oversight Task Force to negotiate and oversee a deal with the city. Developers got their rezoning, in exchange for a broad range of public benefits, including a new school and affordable housing.
Effective planning requires that decisions be made jointly at the regional, city, and community levels. It should be a system of layered co-governance. Exclusive reliance on regional plans can lead to systemic disregard of local wants and desires while strictly community planning can produce parochial decision-making. A necessary part of planning is zoning reforms that permit the construction of more housing, without also creating easy profit opportunities for speculators at the expense of established communities.
Federal planning is important as well. A common YIMBY refrain is that the current economic geography of the United States, and resulting housing crisis on the coasts, is primarily the product of the economics of agglomeration, in which the productivity of any given firm is a function of the number of other businesses also operating in the same place. The coastal cities where housing costs have exploded, the argument goes, are simply the most productive cities, which naturally attract the lion’s share of labor and capital. In this view, the role of policy is helping people “move to opportunity,” by building more housing for them in wealthy cities.
The agglomeration view, however, neglects other factors that have concentrated wealth in a few cities, such as monopoly power concentrating wealth on the coasts where the largest firms are located, and the powerful role federal policy has played in creating and entrenching the regional economies of places like Silicon Valley in the first place. (In the case of Silicon Valley, defense contracts and publicly-funded university research have played a key role.) Seen in this light, reforming housing policy to cram 10 million more people into San Francisco and New York in blind obedience to the laws of agglomeration is the wrong tool for the job, when directing industrial policy to create jobs and generate opportunities where people currently live is also on the table.
Social Housing
The public sector should build and operate housing. Between the 1930s and 1970s, the federal government financed the large-scale housing construction by municipal authorities. Due to a combination of federal and local policy, white flight, and deindustrialization, some of this housing became shelter of last resort for many poor Black families. Academic and popular commentary offered public housing developments like the now-demolished high-rise complexes Cabrini-Green in Chicago and Pruitt-Igoe in St. Louis as warnings against further public development of housing. This distorted and incomplete history has stigmatized publicly operated housing in this country ever since.
Global experience shows public or social housing can work well. Public authorities in places as diverse as Singapore, Vienna, and Montgomery County, Maryland have successfully developed housing in pursuit of community, as opposed to purely pecuniary, aims. They offer affordable homes, attractive to a wide segment of the population, and Singapore and Vienna have made affordable housing the norm for their residents.
Social housing done right can advance at least two public policy objectives. It can supply decent housing for poor and working-class households that are often not profitable for private developers to serve. In addition, social housing development can impose competitive discipline on private rivals. As a public option in the housing market, it can rein in the pricing power of private landlords and pressure them to raise standards of habitability for poor, working, and middle-class families.
• • •
The housing crisis in the United States is chronic and has become more acute in recent years. Millions struggle to keep a roof over their heads, and even many more affluent households cannot buy a home. One solution — liberalizing zoning rules — has gained popularity and been touted as the key fix to the American housing market. But empowered private actors, free to build, are still in the business of making money, not providing shelter for all. Even under thoroughgoing zoning reform, they will still lack the incentives to build and rent out sufficient affordable housing. The landlord cartel orchestrated by RealPage in cities across the nation attests to that. The country’s housing crisis will not be solved through simple deregulation of zoning laws and building codes — it requires ambitious public action. Federal, state, and local governments must pursue stronger public governance of housing markets, undertake systematic planning, and build homes themselves.
