Don’t blame AI for Sacramento’s housing crisis

OPINION – It’s no secret that Sacramento has a rental affordability crisis. Roughly 30% of Sacramento residents spend half their wages on rent, and the California Housing Partnership found that renters in Sacramento County need to earn 2.1 times the state minimum wage to afford the county’s average monthly asking rent.

Some lawmakers are responding — but not in the right direction. Instead of addressing the root causes, they are targeting so-called “artificial intelligence” algorithms used in rental pricing software. Senator Sasha Renée Pérez (District 25), who represents Sacramento, recently introduced SB 52, the “End AI Rent Hikes Act,” aimed at banning AI-based pricing software some landlords use to help price their rents. The California attorney general, Cities of Berkeley and San Francisco, and even federal decisionmakers have proposed similar measures.

However, dynamic pricing algorithms aren’t some sinister force — they power the deals many of us rely on every day (me included). From airlines to hotels to Kelley Blue Book to Amazon, algorithmic software adjusts prices in real time, helping consumers find affordable and best-fit options among thousands of possible alternatives. California banning this technology in housing could set a dangerous precedent that undermines its use everywhere — while doing nothing to fix the actual drivers of high rents.

At its core, the housing affordability crisis is a supply-demand imbalance problem. There is insufficient housing to meet the demand in Sacramento, where people are moving in from even costlier areas like San Francisco, intensifying competition for limited housing.

From 2010 to 2020, the Sacramento metro area (covering El Dorado, Placer, Sacramento, and Yolo counties) saw an 11.6% population increase — from 2.15 million to 2.4 million people.  But the housing stock only grew by 7.1%, from 871,793 to 933,562 units. Based on 2010 occupancy rates, the region would have needed roughly 972,500 units by 2020 — hence there’s a shortfall of 40,000 homes.

When supply lags demand, prices rise. Anywhere. A recent Economist article (“Why rents are rising too fast”)  shows similar surges in Switzerland, France, Australia, Portugal, New Zealand, Canada, and Germany, besides the US.

Another global factor besides supply squeeze is high interest rates. When landlords face higher mortgage costs, they often pass those along to renters — especially in markets where supply is constrained. A doctoral thesis at the University of Pennsylvania’s Wharton School estimated a 5.5% increase in rents from a 1% increase in interest rates.

The shortage is made worse by how difficult — and expensive — it is to build housing in California. Permitting delays, zoning restrictions, and expensive compliance requirements slow down construction and inflate costs.

Ironically, prohibiting the use algorithms could make prices remain high for much longer. Because when market conditions change — such as a drop in demand — algorithms are quicker to respond by lowering rents accordingly. In fact, Sacramento’s rents are currently trending downward. Zillow reports that the average rental price dropped from $1,993 in January 2024 to $1,971 in March 2025. Now, Sacramento is no longer on the top 25 most expensive places to live (in 2023, it was #15).  If algorithms were pushing rents upward without constraint, this wouldn’t be happening. These tools are giving landlords insight into when their asking costs need to decline.

Another overlooked benefit: better renter-property matches. Algorithms can help renters find homes that suit their preferences — and landlords find tenants who value specific features. For instance, Joe might want a quiet cul-de-sac, while Mary prefers the buzz of midtown. A good algorithm increases the chances that each finds their ideal place. Even if they pay slightly more for their preferred location, both end up better off.

Banning pricing tools won’t solve Sacramento’s housing crisis. These tools don’t invent prices — they reflect them. What’s really needed is more and affordable housing.

The takeaway? Don’t shoot the algorithm. Focus on the fundamentals. Sacramento — and California — must make it easier to build homes. That is a vital aspect of solving the rental affordability crisis.

Distinguished Professor Hemant K. Bhargava holds the Suran Chair in Technology Management at UC Davis, and is an academic leader in economic modeling and analysis of technology-based business and markets.