Housing Market Failures
By Matthew Dustin
In general, markets for goods and services work so well that we don’t even have to think about it. However, there are fundamental requirements that must be in place for markets to produce competitively efficient outcomes, such as lower prices, higher quality products, variety of choices, adequate customer service, etc.
These requirements for markets provide buyers and sellers with competitive, efficient outcomes, including:
Many buyers and sellers foster competition
Accurate information is widely available
Property rights and contracts are established and enforced
‘Externalities’ are minimized (costs and benefits of a purchase or sale must be kept largely ‘internal’ to the exchange - experienced by the buyer and seller only)
When any of these requirements are violated, you can still have markets, but the outcomes they produce will not be efficient in terms of the allocation of resources. This outcome is known as ‘market failure.’
“We also find that investors raise rents at 60 percent higher rates than the average increase when first acquiring the property, and higher investor share in a neighborhood is correlated with faster rent increases for non-investor landlords.”
In rental housing markets, we are increasingly seeing market failure through a lack of competition, as there are fewer and fewer different sellers. Increasingly, ‘institutional investors’ own multiple properties within a geographic rental market. This move away from competitive markets with ‘many sellers’ and toward concentrated (or oligopolistic) markets produces inefficient outcomes for renters and buyers. In concentrated markets where a few buyers gain market power, they can engage in anticompetitive practices, including collusion on prices and contract components that directly and indirectly increase prices. Research has shown that renters experience the ‘inefficiencies’ of this market failure as increased costs (rents as well as related fees), increased speed of rising rents, increased instability via evictions, and increased racial discrimination.
Collusion occurs when separate owners agree to coordinate their prices or to otherwise engage in anti-competitive behavior. Collusion has the same outcomes as market concentration, as colluding owners act as a single entity, reducing the number of sellers in the market. The Department of Justice is the regulatory body in the United States that enforces competition in markets and prevents anti-competitive behavior, including collusion. The DOJ in 2023 brought cases against anti-competitive behavior by institutional investors and, in early 202,5 created a task force to combat anti-competitive behavior in housing markets. However, there is a move away from this regulatory enforcement just as market concentration increases, institutional investors find new ways to disguise their actions through LLCs and shell companies, and new tools are built on their collection of rental market data.
Mandating disclosure for institutional investors
Rental market regulatory reform will hinge on overcoming evasion methods from institutional investors. Institutional investors often hide behind LLCs and shell companies, making it difficult for regulators to track bulk acquisitions. In 2025, the Treasury’s Financial Crimes Enforcement Network published a rule that exempts all domestic companies and U.S. persons from beneficial ownership information reporting requirements. A future administration must direct the Treasury Secretary to expand beneficial ownership disclosure to cover domestic entities. This data should be shared across the Department of Housing and Urban Development, Treasury and the Federal Housing Finance Agency, allowing regulators to detect when investors use opaque ownership structures. This will restore the ability to identify the real parties behind property purchases and enable regulators to police anti-competitive behavior.
Collusion is prohibited, including in rental markets. However, data broker tools like RealPage collect market data from owners and then sell back recommendations for the price, lease terms, and lease renewal decisions. This enables owners in a geographic rental market to coordinate their rental pricing and terms. This ‘algorithmic collusion’ reduces competition in rental markets. The Attorney General of Washington DC brought a case alleging algorithmic collusion between institutional owners in that rental market. He stated that this behavior of owners utilizing algorithmic data resulted in an effective ‘housing cartel.’ The Department of Justice must continue to prosecute such collusion and appoint a task force to identify such behavior and financially penalize those involved.
1: Fields and Uffer (2016); Raymond et al. (2021); Gurun et al. (2022); Lee and Wylie (2024)