Does Price Optimization Hike Rents? YieldStar AI Price Prediction May Inflate Rents

unnamed--11-
An algorithm that’s widely used to price property rentals may be helping to drive up rents in the United States.

What’s new: YieldStar, a price-prediction service offered by Texas-based analytics company RealPage, suggests rental rates that are often higher than the market average, ProPublica reported. Critics believe the software stifles competition, inflating prices beyond what many renters can afford and adding to an ongoing shortage of affordable housing.

How it works: The algorithm analyzes leases for over 13 million units across the U.S. to calculate prices for 20 million rental units daily. Five of the 10 largest property management firms in the U.S. use it. Former RealPage employees told the authors that property managers adopt around 90 percent of its suggested prices.

  • The lease data, which is gathered from YieldStar customers, includes current rental price (which may differ from the rate that’s advertised publicly), number of bedrooms, number of units in a building, and number of nearby units likely to go on the market in the near future.
  • The company advertised that YieldStar could help clients set prices between 3 and 7 percent higher than the market. It removed the information following the report by ProPublica.
  • The cost to rent a one-bedroom apartment in a Seattle building with prices set by YieldStar increased 33 percent over one year, while the price of a nearby studio where rents were set manually increased 3.9 percent in the same time period.

Behind the news: Automated pricing has had mixed results in real estate. Offerpad, Opendoor, and Redfin use algorithms to estimate a home’s value, and their systems account for around 1 percent of U.S. sales. Zillow shuttered a similar program last year after it contributed to over $600 million in losses.

Yes, but: Experts in real estate and antitrust law say that RealPage’s products enable rival property managers to coordinate pricing, a potential violation of U.S. antitrust law. In addition to the pricing algorithm, the company hosts user groups where property managers share feedback.

  • RealPage, responding to the report, asserted that it does not violate antitrust laws because its data is anonymized and aggregated.
  • RealPage supporters told ProPublica that a shortage of housing is the real driver behind rising rents.

Why it matters: Advertised rental rates rose 17 percent between March of 2021 and 2022. Several factors contributed to the increase, but automated pricing tools like YieldStar could diminish tenants’ power to negotiate lower rents.

We’re thinking: YieldStar’s role in rising prices is unclear, but any automated system that has potential to manipulate markets at a large scale warrants regulatory oversight. There is precedent: In the 1990s, the U.S. Justice Department forced airlines to change a shared pricing algorithm after finding that they had overcharged travelers by $1 billion. The black-box nature of AI systems means that regulators will need new tools to oversee and audit potential AI-driven coordination of prices.