Friends of ResiShares:
In my early twenties, I had a colleague with a unique talent for faking foreign accents. He would routinely attempt to convince new people to whom he was introduced that he was from <insert foreign Anglophone country>. It looked fun.
While I unfortunately lack this talent, an article last month about Realpage inspired me to attempt to fake a Matt Levine accent in this month’s Resi Wrap. For those unfamiliar with Matt Levine, his brilliant daily column, “Money Stuff,” is (quite deservedly) one of the most widely read throughout the finance industry. I highly recommend you all sign up to receive it in your inbox.
Among the ongoing stories he tracks through time is the question of whether index funds should be illegal. According to this theory, if all the public companies in a sector (such as airlines, for instance) are owned by a handful of large, passive index funds, then there is no financial incentive for their owners to encourage them to compete. Index funds, therefore, implicitly incentivize price fixing, as the rising tide of oligopoly raises all boats, making them, as owners of the entire sector, happy. While academically interesting, there has yet to be a concerted push by policymakers to outlaw index funds.
As for Realpage’s revenue management tools, we shall see. If you can, as you read what follows, pretend that you’re reading the words of a witty, erudite Bloomberg columnist and not a small group of math nerds who invest in real estate. Disclosure: it’s the math nerds.
People Are Worried About Revenue Management
A fun working model for a data business might be:
1) You are a smart quantitative analyst who has a friend in the business of pricing and selling a thing.
2) You tell your friend, “give me all of your internal data about prices and sales volumes and customers of the thing, and I can build a smart computer program to help you make more money selling the thing.”
3) The more data your computer program has, the more accurate and useful its recommendations will be, so you then go around to all the other businesses that make the thing and ask them to give you all their customer data as well.
4) Eventually, you have aggregated a semi-proprietary database from a meaningful enough percentage of the thing industry that no one who wants to sell the thing can succeed without paying you.
This is a good business!
Market research firms like Nielsen and Kantar do this. Corelogic’s Loan Performance Insight (LPI) does this. They make, like, lots of money.
But could it be illegal price collusion?
The argument goes like this:
If companies are setting their pricing based on an optimization algorithm from a third party, and that third party has access to how their major competitors are pricing their product, then the algorithm SHOULD optimize by discouraging price competition.
In particular, this article from ProPublica suggests a contributor data model owned by Realpage is the reason that the Rent Is Too Damn High. The article interviews an antitrust prosecutor, who says,
“If competitors agreed among themselves to use the same algorithm and to share information among themselves with the purpose of stabilizing pricing, that would be per se illegal,”
I mean, maybe?
He then goes on to say,
[H]e knew of no cases where companies had been prosecuted for what’s known as tacit collusion while using the same algorithm to set prices.
That’s probably right. It would set a very aggressive precedent to suggest that contributor data businesses are illegal collusion. Of course, I suppose it might be a problem if an email were to turn up from Realpage to a major landlord client with the subject line “Rent Fixing” and the body text, “HAL 9000 saw that you advertised $1750 for a junior 1BR at 123 Main Street. I’m sorry Dave, I’m afraid I can’t do that.” This is DEFINITELY NOT legal advice.
Luxury Home Volatility
Sometimes someone buys a house because she wants to live in that house. Sometimes someone buys a house because she wants to earn income on the house, and eventually sell it for a profit. Since people generally like living in houses, and the overall amount of houses in a given area is not something that changes too quickly, the price of houses is usually fairly steady and predictable.
Banks like to lend against houses. Because housing prices are usually steady and predictable, banks are often willing to lend lots of money against houses (typically 80% of the value of the collateral) at relatively low interest rates. Sometimes, people pay too much money for houses and lose their jobs, and then cannot pay the interest and principal on their loan. The home then gets foreclosed upon and sold at a loss. Sometimes, like in 2008, this happens all at once to a lot of people in the same neighborhood.
Historically, this has happened more frequently in neighborhoods populated by people with less money than average. As a result, real estate people generally agree that home prices in lower-priced neighborhoods are more volatile than those in higher priced neighborhoods.
The luxury housing market is insanely volatile.
From the WSJ article:
In June, Sue Gross, ex-wife of retired billionaire bond king Bill Gross, reduced the asking price on her Beverly Hills estate to $28.9 million, a significant reduction from the $38 million she asked when first listing the property in July 2021. (It was also less than the $35 million she paid in 2018 to purchase the property from Ellen DeGeneres and her wife, Portia de Rossi, records show.) The property, which is located above Sunset Boulevard, is Midcentury Modern in style and spans about 5,300 square feet with four bedrooms. The price cut appeared to do the trick; the property sold for $23.25 million, a roughly 39% reduction compared with the original asking price, five months later.
The home was down 33% since 2018? Housing prices are really not supposed to move like that. Also, according to Zillow, Beverly Hills real estate was UP 9% since 2018. Can you imagine how that call with the real estate agent went?
Sue Gross: “How’s the sale coming?”
RE Agent: “I would recommend you cut the price.”
SG: “Oh good idea. Let’s cut it to like $36 MM. Way below market. We’ll start a bidding war!”
REA: “Yeaaa…I was thinking more like $28.9 MM. If we’re lucky, we can get someone in the door and they won’t hit us too hard on the subsequent negotiation.”
REA: “Are you still there?”
SG: “How much is Bill paying you to do this to me?”
The luxury housing market is not the housing market. It sometimes doesn’t even move in the same direction!
Interestingly, the market for starter homes may be subject to its own dynamics as well.