How algorithms are worsening the housing affordability crisis

Texas-based property management software RealPage is being investigated by the feds.

By Alexandra HartJune 25, 2024 4:38 pm,

If you’ve recently thought “the rent is too dang high,” there may be an algorithm behind the rising cost of living for apartment dwellers.

Property management software like Texas-based RealPage has become part of many property managers’ and real estate investors’ business strategies. But with rental prices becoming increasingly unaffordable for many Americans, such software and rent pricing algorithms have been drawing scrutiny – including being investigated by the FBI.

Maureen Tkacik, investigations editor for the American Prospect, reported on this phenomenon for the magazine. She joined the Texas Standard to discuss how these algorithms work and how they can drive up rent prices.

This transcript has been edited lightly for clarity:

Texas Standard: Now, for those who don’t rent – maybe some who do may not be familiar with this software – RealPage, I understand, is sort of the parent company, and YieldStar is like its crown jewel in a whole suite of products that they market to people who own apartment complexes. Is that right? 

Maureen Tkacik: That’s right. YieldStar is an apartment pricing recommendation software – or at least that’s what they say it is. And this is yes, the flagship product at a company called RealPage that has thousands of institutional apartment owners as clients.

YieldStar works by giving you a recommendation for how to price a given unit in your building. What the FBI and and investigators have realized is that it acts more like a cartel. You’re not really given a choice whether you want to take RealPage’s recommendations. They will put a lot of pressure on you if you try to price your apartment lower. 

Why would someone want to price their apartment lower than what the market rate is? Isn’t that what RealPage and YieldStar are promising here – “we’re going to be able to maximize the value, the amount of money that you can get for your apartment. We’ll give you a price. And if you stick with it, then everyone wins.”

Right, that’s what everyone sort of assumes that YieldStar was. But there have been many RealPage executives and software programmers who had gone undercover or have flipped and become expert witnesses for a lot of the class action lawsuits now pending against the company. They say that the current iteration of YieldStar software is really a bastardization.

They give you a price that is way higher than what the actual market rate is. And then you’re expected to rent out your unit at that rate. And a lot of leasing agents balk initially at these prices and say, “I’m not going to fill up my buildings at that price.”

And so a lot of what RealPage does is try to train leasing agents to stop worrying about occupancy – to stop, as they say, actually bowing down to the occupancy gods and get comfortable with lower occupancy. 

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What the effect of that is, it seems to me, is that as you’re trying to remove units from the marketplace – which, of course, you remove supply and we know what happens with pricing: pricing will then go up. But what some investigators are saying is that this has the effect of basically driving up prices across the board, because it’s not only that this particular landlord has fewer rooms and then is going to try to charge more for them, but across town, you’re going to find fewer rooms as more and more people try to drive up the prices based on this RealPage/YieldStar approach. 

That’s exactly what happened. And as certain clients were charging more and more money, they were starting to make more and more money. And everyone wanted to be a RealPage client.

So as a result, now we have a lot of cities – Dallas is among them; I think that Atlanta’s a big one – where RealPage has almost an 80% market share over the number of available apartment units that are priced using it.

And that has given the algorithm an incredible amount of power. And as a result, in a lot of these cities, you have very high vacancy rates across the board. So you’ve gotten a lot of massive rent hikes over the past eight years, even though vacancy rates are really pretty high. 

Are there regulatory measures that are being contemplated to curb the use of this software? 

Absolutely. The Department of Justice is actually conducting a criminal investigation of RealPage’s YieldStar cartel. And, they’ve already raided at least one of their institutional landlord clients in conjunction with that investigation. This is criminal price-fixing activity, if the allegations turn out to be true. So, you know, they might have to face serious consequences.

And already, I think YieldStar clients have started to sort of try and bake in some plausible deniability to what they’re doing. But Fannie Mae and Freddie Mac are also conducting sort of related investigations into overvaluation and some of the underwriters and some of the appraisers who are working with them.

But it’s going to take a very long time to untangle, because, like I said, in a lot of markets, these rental hikes and the assumption that they would be able to go on forever were baked into the underwriting standards. So you’ve got a lot of underwater apartment buildings. 

We need to underscore something. There has been no criminal trial. No one’s been convicted of any wrongdoing. What are YieldStar and its parent, RealPage, saying about the value of their software in these allegations of cartel-like behavior?

They have said what you would probably assume that somebody in that position would say: that, no, it’s just an algorithm; it’s just a recommendation. There’s no penalties for going against the RealPage recommendation; if there have been cases of retaliation or undue pressure, those were bad apples.

It’s very difficult to prove price-fixing cases because of just judicial precedents over time – the threshold is very high. I think given what I’ve seen in some of the civil cases, they’ve got a really good case. But it takes a very long time to make a case like this.

So yes, they have basically denied that it is a cartel. And there’s two attorneys general, I should say – Arizona and DC – the attorneys general have already sued RealPage, alleging a price-fixing conspiracy. 

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