Pricing software takes the blame for America’s unaffordable rents

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One of the most important decisions homeowners can make is how much to charge for their space. If the price is too high, the property could stay on the market, losing revenue every day. But set the price too low and you risk leaving profits on the table compared to what the market would have paid. The risk of undervaluing a lease in a commercial building is compounded by the fact that a building’s value is at least partially determined by its revenue, which means that a small drop in profit could mean a large drop in property value.

One of the ways homeowners have been able to determine the optimal price for their space is through software. For multi-family buildings, that software is often RealPage, whose YeildStar product can use sophisticated algorithms and proprietary data to understand the true appetite and therefore price of a given unit. While this software has been quite successful for homeowners, it is increasingly being scrutinized by the general public for its alleged role in keeping our cities unaffordable.

This week an article was published in ProPublica titled The rent goes up? A company’s algorithm could explain why. The article discusses how RealPage’s YeildStar software often recommends landlords raise rents, even during the pandemic. An unidentified developer of the algorithm used by YeildStar went so far as to say that rental agents had “too much empathy” with computer-generated prices.

The article created quite a stir, as one might expect. More Americans are struggling to pay their rent and find themselves with few options now that higher interest rates have made mortgages more expensive. But this wasn’t the first time this accusation had been leveled against the software and its parent company. A few years ago I was contacted by an author named James Nelson who had recently written a book on the pricing algorithm called Robbing Your Home: How Artificial Intelligence Is Hijacking the American Dream. I interviewed Nelson about his research for the book and wrote an article about it in October 2020. Overall, I was interested in his claims that using the same pricing software, the big landowners acted like a cartel. But I had some doubts about this accusation which I think still rings true today.

“Cartels are created by monopolies and even in cities where many large landlords share data, their overall rental stock ownership is likely far from a majority,” I wrote. “Large landlords also don’t control the supply of the product to the market, anyone can develop more housing, although many large landlords are certainly among the main financiers of large developments in most cities.”

I still think it’s overkill to call owners using the same pricing algorithm a cartel. I also don’t think we can point to this software as the cause of our housing affordability crisis. While it’s easy to point to “big tech” as the evil puppeteer of our cities’ problems, that doesn’t take into account all of the other forces at play. I still argue that the real source of skyrocketing rent prices is a lack of supply. Of course, the algorithm could exploit the general lack of housing stock that has been created in most cities, but that is only the symptom and not the cause of the problem.

But no matter what I might think, this heightened awareness of how landlords price their homes has angered the general public about PropTech and could put it in the crosshairs of regulators. While the secrecy of products like YeildStar gives it a competitive edge over potential rivals, the “black box” approach to such calculations makes consumers skeptical.

The ProPublica article could be just another flash in the pan caused by “gotcha” journalism. But even if nothing emerges from the reaction to the editorial, it highlights a growing dissatisfaction with secret technology that affects our daily lives. Other tech industries have already started making their decisions more transparent, sometimes even hiring third parties to certify that the algorithms don’t discriminate. PropTech companies would be smart to follow suit. Owners should be able to rely on software to help them make one of their most important decisions, but it’s not ridiculous to think that those affected by those decisions might want a little more explanation. In my opinion, it is better to be transparent voluntarily than to expect regulators to do so by force.

Understood

Mapped

In order to better understand how far YieldStar’s pricing algorithm goes, I found this card which shows all markets covered by RealPage.

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