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Yeah. Well, we're in an affordability
00:00:02
crisis when it comes to uh to the
00:00:05
residential housing market. Um many
00:00:07
households are paying an extraordinary
00:00:09
fraction of their income towards housing
00:00:11
expenses, whether that's rents or or
00:00:14
whether that's their their mortgage uh
00:00:15
their mortgage payments. And um in a
00:00:18
piece I wrote for the Aspen Economic
00:00:20
Strategy Group with Vincent Raina um
00:00:22
that came out in November, we outlined a
00:00:24
list of potential solutions for dealing
00:00:26
with affordability. Um, but ultimately
00:00:28
it comes down to an imbalance in supply
00:00:30
and demand. Uh, we simply don't have
00:00:32
enough uh affordable housing units in
00:00:34
the cities where people want to live.
00:00:36
Welcome to the Ripple Effect, a podcast
00:00:39
that takes you on a journey [music]
00:00:40
through the minds of Wharton faculty.
00:00:42
I'm your host, Dan Looney, and in each
00:00:44
episode, we'll be diving deep into the
00:00:46
inspiration behind the groundbreaking
00:00:48
[music] research that Wharton professors
00:00:50
have conducted and exploring how their
00:00:53
findings resonate with the world today.
00:00:56
We have seen the real estate market have
00:00:58
quite the up and down ride the last few
00:01:01
years. Home prices soared of course
00:01:03
during the time of the pandemic and
00:01:05
haven't lost a whole lot since.
00:01:07
Meanwhile, the commercial market has had
00:01:09
to deal with the work from home dynamic
00:01:11
change how some companies think about
00:01:13
their real estate footprint. So, what
00:01:15
lies in the sector ahead? Pleasure to be
00:01:17
joined [music] by Ben Keys, professor of
00:01:19
real estate here at the Wharton School.
00:01:21
Ben, great to catch up with you. How are
00:01:22
you, sir?
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>> I'm doing well. Thanks for having me,
00:01:25
Dan. Happy New Year.
00:01:26
>> Happy New Year to you as well. It's
00:01:28
interesting when you think about this
00:01:30
industry right now, the word that
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seemingly comes up on so many different
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interviews in so many different places
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is seeing stability. Stability being
00:01:39
that key word it seems like for 2026.
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Well, I think that's right. And and it's
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stable in the sense that we're not
00:01:45
expecting big swings in in house prices,
00:01:48
especially in the residential side of of
00:01:51
the market. This is a market that is
00:01:53
struggling on a number of different
00:01:54
fronts. And I'm not sure if it's
00:01:56
stability or or stasis or if it's stuck.
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Um, but all of those things uh
00:02:02
ultimately lead to a similar pattern
00:02:03
where we're going to expect national
00:02:05
house prices to be relatively flat over
00:02:08
the coming year. And those national
00:02:10
house prices being flat are going to
00:02:12
sort of hide a lot of interesting
00:02:14
variation across the country. All right.
00:02:16
So, we normally talk commercial and
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residential. Let me start with
00:02:20
residential. Uh mortgage rates have come
00:02:22
down a little bit. They're still higher
00:02:24
than what we saw, you know, during the
00:02:26
time of the pandemic. Uh we still have
00:02:28
what's perceived to be a a fairly
00:02:30
important shortage of properties. Uh
00:02:32
these seem to be like two of the biggest
00:02:34
issues out there right now. Yeah. Well,
00:02:36
we're in an affordability crisis when it
00:02:38
comes to uh to the residential housing
00:02:41
market. Um, many households are paying
00:02:44
an extraordinary fraction of their
00:02:45
income towards housing expenses, whether
00:02:48
that's rents or or whether that's their
00:02:50
their mortgage uh their mortgage
00:02:52
payments. And um in a piece I wrote for
00:02:54
the Aspen Economic Strategy Group with
00:02:56
Vincent Raina um that came out in
00:02:58
November, we outlined a list of
00:03:00
potential solutions for dealing with
00:03:02
affordability. Um but ultimately it
00:03:04
comes down to an imbalance in supply and
00:03:06
demand. uh we simply don't have enough
00:03:09
uh affordable housing units in the
00:03:10
cities where people want to live.
00:03:12
>> What are some of those ideas that you
00:03:14
think are going to be important moving
00:03:15
forward?
00:03:16
>> Well, I think there are a lot of
00:03:17
different proposals on the table. Some
00:03:19
of those we're seeing from the
00:03:20
administration just this week, sort of
00:03:23
policy by tweet. Uh but if you if you
00:03:26
think a little bit more substantively
00:03:27
about about the challenges, it is really
00:03:30
about supply. Um and uh and sometimes uh
00:03:34
you know there are there are folks in
00:03:35
the in the housing market that refuse to
00:03:37
believe in the dynamics of supply and
00:03:39
demand and the ways in which they play
00:03:41
out. But ultimately affordability in the
00:03:43
housing market is is is a function of
00:03:45
supply and we need to make it easier to
00:03:47
build. Um we need to ensure that
00:03:49
construction financing is available um
00:03:52
through the through the interest rate
00:03:55
cycle and and broader business cycle. Um
00:03:57
we need to do more to expand the the
00:03:59
housing safety net. Um and I think we
00:04:02
need to make home ownership a priority
00:04:03
when it comes to um the challenges that
00:04:06
um first-time buyers face in competing
00:04:08
with uh with investors. So one of the
00:04:11
things that has been a question in my
00:04:13
mind for a long time is if you go back
00:04:16
you know 60 70 years uh a lot of that
00:04:20
affordability was assisted by the
00:04:22
starter home. And it seems like we've
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done away with the starter home for the
00:04:26
most part. you know that that property
00:04:28
that you're just talking about that
00:04:30
first property that somebody's looking
00:04:31
to buy gets them indoor to home
00:04:33
ownership and then they can live in that
00:04:35
house for maybe 10 years whatever and
00:04:38
build up to that next house. Now it
00:04:40
seems like everything is $400 $500,000
00:04:44
and above and that's hard for a lot of
00:04:46
people to consider to be a starter home.
00:04:49
>> Absolutely. That first rung on on the
00:04:51
housing ladder uh that you know gets
00:04:53
your foot in the door to home ownership.
00:04:54
It gives you an opportunity to build
00:04:57
some equity and it also gives you a
00:04:58
chance to access a neighborhood that you
00:05:00
might not otherwise have been able to
00:05:01
access. When it comes to school quality,
00:05:03
when it comes to safety, when it comes
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to some other amenities, those are
00:05:07
harder and harder to find. We are seeing
00:05:09
a small decline in the size of new homes
00:05:12
being built. So, new homes are shrinking
00:05:14
just a little bit on average. But that
00:05:16
said, I think your point is is a good
00:05:18
one, which is um that the that most
00:05:20
affordable tier of of housing is not
00:05:23
what's being built. And a lot of that is
00:05:25
a function of the high fixed costs of
00:05:27
construction. It's difficult for
00:05:29
builders to get uh approved. Um so to
00:05:32
get permits um and zoning challenges,
00:05:34
something we've discussed for a long
00:05:36
time is a big barrier. When you raise
00:05:38
those fixed costs, it means there's a
00:05:39
higher hurdle to construction. We've
00:05:42
also seen construction costs rise
00:05:43
sharply um really over the last 10
00:05:46
years. um you know house uh con house
00:05:48
housing construction costs are up about
00:05:50
60%. Over the last 10 years and that's a
00:05:52
function of both materials, labor, land
00:05:55
and everything in between. And now you
00:05:57
add financing costs with high interest
00:05:59
rates. And all of those things point to
00:06:01
developers choosing to build at the high
00:06:02
end rather than the low end. Well, you
00:06:05
mentioned uh the uh policy by tweet. Uh
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there are obviously a couple of things
00:06:11
in the most recent period that we heard
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from the administration. uh one being uh
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that you know people that are connected
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to the president buying uh mortgage back
00:06:21
securities to maybe help uh lower rates,
00:06:24
but the other thing was that President
00:06:26
Trump brought up was corporate ownership
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in single family homes and trying to
00:06:32
maybe ease that out a little bit. I I
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don't know where both of those
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components live. I don't know if you
00:06:38
wanted to speak about either one of
00:06:40
those, but the government seemingly is
00:06:42
going to play a role in trying to
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alleviate some of these issues, isn't
00:06:46
it?
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>> I I think that's right. What's clear is
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that the the problem has been diagnosed
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by the administration that we have an
00:06:52
affordability problem. You know, maybe
00:06:54
maybe the administration read my op-ed
00:06:56
in the Hill this past week uh with my
00:06:59
colleague Vincent Raina on on improving
00:07:01
housing affordability. Um but they are
00:07:04
throwing some ideas uh at the wall and
00:07:06
seeing what sticks. The worry I is that
00:07:09
a number of these these ideas are going
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to stimulate demand rather than supply.
00:07:15
And what that means in the housing
00:07:16
market is that's going to bid up prices.
00:07:18
And so if we think about things like the
00:07:21
the 50-year mortgage or um you know
00:07:24
buying mortgage back securities to try
00:07:25
to drive down the mortgage interest rate
00:07:27
that is going to make um you know
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housing purchasing more accessible for
00:07:31
those people on the margin who are you
00:07:33
know feeling crowded out because of high
00:07:36
interest rates. But at the same time
00:07:37
there's going to be more of them bidding
00:07:39
bidding for a scarce number of houses.
00:07:42
And so there's going to be a portion of
00:07:44
that that's going to be captured by the
00:07:46
existing owners in the form of higher
00:07:48
prices. It's hard to know exactly how
00:07:50
how that all plays out, but I think, you
00:07:53
know, if we're looking at the the
00:07:54
spectrum of potential policy responses,
00:07:57
I think doing things that are largely on
00:07:59
the demand side are probably going to
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have unintended consequences. I'm much
00:08:03
more excited with with policies that are
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going to stimulate supply. And some of
00:08:07
those are really uh when it comes down
00:08:10
to it about building new uh new housing,
00:08:12
new construction, new units.
00:08:14
>> But the the administration's proposal to
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to squeeze uh institutional investors
00:08:19
out of the market is another you know
00:08:21
potentially very controversial and you
00:08:24
know potentially illegal uh proposal uh
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when it comes to thinking about um about
00:08:29
solutions to get people into home
00:08:30
ownership. If you think about the large
00:08:33
institutional investors in the US, those
00:08:34
that own, you know, a thousand uh homes
00:08:37
or more, they represent only 1% of the
00:08:40
US housing stock. And so on the margin
00:08:43
at that scale, it's just not going to
00:08:45
move the needle for the affordability
00:08:46
issues in the country. But as we go
00:08:49
further down and we think about the
00:08:50
overall investor share in the market, it
00:08:53
is on the order of 10% of all single
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family homes in the country are owned by
00:08:57
investors. And so, you know, I think
00:08:59
there are things that can be done
00:09:00
through the tax code, um, through credit
00:09:03
markets that that could, um, reduce the
00:09:05
benefits of ownership for investors and
00:09:08
and steer those more towards, um, owner
00:09:11
occupied residences. But I think, you
00:09:12
know, you know, fiat by tweet is
00:09:15
certainly not going to get it done.
00:09:17
>> And and we need to do something that
00:09:18
that's far more um, thoughtful and um,
00:09:21
and resilient to um, to to potential
00:09:23
challenges in the court.
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>> What about the rate lock component? And
00:09:27
that's something that we've talked about
00:09:28
for several years now. I mean, when you,
00:09:31
you know, got into the early days of the
00:09:33
pandemic, so many people refinanced at 2
00:09:36
and 3/4, 3%, three and and a quarter% on
00:09:39
their existing home. That allowed them
00:09:42
to open up and and do home projects. And
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there's just not a want or a need for
00:09:48
many people to move because of that. And
00:09:51
that's the component that I I'm you know
00:09:54
from a historical perspective I don't
00:09:55
think we had prior to the pandemic. You
00:09:57
can correct me if I'm wrong in that, but
00:09:59
it it's a dynamic we're going to have in
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this mix for quite some time. It it is
00:10:04
and and it's something we've we've been
00:10:06
talking about for years now and will
00:10:07
continue to talk about for years because
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over 50% of all outstanding mortgages in
00:10:11
the US have interest rates below 4%. And
00:10:15
so when we're talking about doing things
00:10:17
to the mortgage back securities market
00:10:18
that might move interest rates by 25
00:10:20
basis points, you know, from a little
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bit above 6% to a little bit below 6%.
00:10:26
The majority of mortgages are below four
00:10:28
and and most of those people are going
00:10:30
to sit on those mortgages. um that is a
00:10:33
you know one of the the the strongest
00:10:35
performing um assets in their portfolio
00:10:38
is is a below market mortgage and that
00:10:41
induces people to stay in their homes
00:10:42
longer than they otherwise would. I
00:10:45
don't think we've seen this dynamic uh
00:10:46
play out in really modern mortgage
00:10:49
history in the US with this degree of
00:10:52
lock in and I and I think what that
00:10:55
ultimately leads to is many fewer homes
00:10:57
on the market. it leads to to many fewer
00:10:59
transactions and and it leads to these
00:11:01
frictions when it comes to um people
00:11:03
finding where they want to live. I think
00:11:05
one more underappreciated piece of this
00:11:07
is you know co really acted as a type of
00:11:10
musical chairs in the housing market.
00:11:13
There was a big opportunity where the
00:11:15
music was playing interest rates were
00:11:17
low and people reoptimized and a lot of
00:11:19
that reoptimization was accelerated
00:11:21
retirement or it was accelerated
00:11:23
suburbanization. So people with young
00:11:24
families moving to the suburbs, well the
00:11:27
music stopped, interest rates uh shot
00:11:29
back up and now those people are happy
00:11:31
where they are. And so, you know, I
00:11:33
think that that pulled a lot of
00:11:34
transactions forward uh in time as well.
00:11:37
And all of that leads to a more
00:11:38
depressed housing market when it comes
00:11:40
to transaction volume and when it comes
00:11:42
to the availability of properties. I I
00:11:44
mentioned the the uh the commercial real
00:11:46
estate sector and let's spend some time
00:11:49
on that right now. Uh this obviously an
00:11:52
industry that has been impacted by the
00:11:54
pandemic as well because of the dynamics
00:11:56
of how companies have thought about
00:11:58
their footprint. Uh employees working
00:12:01
from home more often. Uh companies
00:12:03
reassessing just how much real estate
00:12:05
they want to have in the mix and that's
00:12:07
leaving a lot of uh you know main street
00:12:13
shops in some cases open and not being
00:12:15
used. Yeah. I mean the just like with
00:12:19
with the residential side of the market,
00:12:21
this has been a gradual process. I think
00:12:23
in some ways the financial crisis in
00:12:25
2008 sort of warped our brains into
00:12:27
thinking that housing and real estate
00:12:28
markets respond very rapidly um to
00:12:31
changing conditions and in fact they
00:12:32
usually respond very slowly. Mo most
00:12:35
office uh leases are 10 years or longer.
00:12:38
Um and so firms are only very gradually
00:12:41
reassessing uh how much space they want
00:12:43
to use. Um but we are seeing a big
00:12:46
uptick in in office um to residential
00:12:48
conversions and uh you know this year um
00:12:51
we're going to see the Flat Iron
00:12:52
Building in New York City um probably
00:12:55
finish their conversion process um into
00:12:58
into residential units and that's kind
00:12:59
of the um you know the the the the
00:13:02
leading uh I would say the leading
00:13:04
example of a very famous building uh
00:13:07
where this conversion is happening. And
00:13:08
I think we are seeing it um play out in
00:13:11
cities across the country where
00:13:13
downtowns um emptied out of many of
00:13:15
their office workers and now um there's
00:13:17
a desperate effort to to bring foot
00:13:19
traffic back to the city and some
00:13:21
buildings are much more easy to to
00:13:23
repurpose than than others. I think that
00:13:25
it also as you alluded to has these
00:13:27
knock-on effects for retail u depending
00:13:30
on the foot traffic in some of these
00:13:31
downtowns and some of the corridors have
00:13:33
bounced back very quickly and others
00:13:35
continue to struggle and that's really a
00:13:37
function of the the industries and the
00:13:39
dynamics city by city. One of the other
00:13:41
hopes I guess was the fact that uh the
00:13:43
ad current administration talked a lot
00:13:45
about uh the repatriation of uh
00:13:48
companies coming into the US uh taking
00:13:51
over facilities, taking over factories
00:13:54
and building out property from there. Uh
00:13:57
that will probably happen to a degree,
00:13:59
but would it happen enough where you're
00:14:01
going to have a significant impact on
00:14:03
the commercial real estate market as a
00:14:05
whole? I I wouldn't think so given the
00:14:07
the dynamics of work from home across
00:14:10
industries, right? The industries that
00:14:11
that I think they have in mind are much
00:14:13
more about manufacturing and um and
00:14:16
really about controlling supply chains.
00:14:19
I think the the kinds of work from home
00:14:21
dynamics is much more about um about
00:14:23
office workers. Um and it's not office
00:14:26
jobs that are that are in the discussion
00:14:27
when it comes to to repatriation. So so
00:14:30
I think those are you know slightly uh
00:14:32
on two different tracks. I think you
00:14:34
know office jobs you know we have seen
00:14:36
firms kind of settling into a work from
00:14:40
home that's uh that's some sort of in
00:14:42
between
00:14:43
uh model where you're in the office two
00:14:46
three maybe four days a week.
00:14:47
>> Yeah.
00:14:48
>> And in that case if you're using you
00:14:50
know your same offices three or four
00:14:51
days a week you probably don't need to
00:14:53
downsize all that much on on your office
00:14:56
space. But there may be some ways in
00:14:58
which you can use that space more
00:14:59
flexibly or more creatively. and we're
00:15:01
seeing firms uh making agreements that
00:15:04
that allow them to do that with with
00:15:06
more flexible agreements. Two final
00:15:08
things I wanted to bring up. First one,
00:15:09
rents. I know you have followed rents
00:15:12
closely. It's been an important topic
00:15:13
for you. Uh we've seen rents come down.
00:15:16
That's obviously going to be a good
00:15:18
thing whether it is uh residential or
00:15:20
commercial moving forward. Where are we
00:15:23
in terms of rents right now?
00:15:26
Yeah, I think um good thing for the
00:15:28
renters uh to see the rents coming down.
00:15:30
I I think we're seeing um continue to
00:15:33
increase supply uh of uh rental units in
00:15:36
in many markets and and that's
00:15:38
delivering on lower rents. We're seeing
00:15:40
increases in concessions from landlords.
00:15:43
So that means like uh offering free rent
00:15:46
or um or some other kinds of perks to
00:15:48
try to get people in the door. We're
00:15:50
seeing big gaps between um the existing
00:15:53
rents that that are being paid and the
00:15:55
rents for for new renters in in a lot of
00:15:58
markets. There's a big wedge between
00:16:00
those. This is an opportunity where if
00:16:02
you're a renter right now, it pays to
00:16:03
shop around
00:16:05
>> and see what's out there because if
00:16:06
you've been in the same place for three
00:16:07
or four years,
00:16:09
>> um chances are that that the new renters
00:16:11
in your building might be paying quite a
00:16:12
bit less than than you are. So in the
00:16:15
cities where where we've seen an uptick
00:16:17
in construction especially since co we
00:16:19
are seeing rents soften that in other
00:16:22
places like in in Manhattan you know
00:16:24
rents remain astronomical. So it it is a
00:16:27
tale of of different markets for sure.
00:16:29
What about the insurance industry and
00:16:32
some of the concerns that they have had
00:16:34
you know about some of the building
00:16:35
areas about uh uh climate change a
00:16:38
variety of different concerns. Insurance
00:16:40
costs have obviously been a big problem
00:16:42
for many people.
00:16:43
>> Yeah. Insurance has been a big focus of
00:16:45
my research over the last couple of
00:16:47
years. We're seeing large increases in
00:16:49
homeowners insurance over the last few
00:16:51
years. And if anything in the commercial
00:16:53
side, insurance has increased
00:16:54
dramatically faster. It's just a much
00:16:56
less regulated market. And and what
00:16:59
we're seeing in this latest wave of
00:17:00
research is that this is having an
00:17:02
effect on house prices. is that the
00:17:03
areas that have seen the sharpest
00:17:06
increases in insurance, which tend to be
00:17:08
those that are most prone to disaster
00:17:10
risk, whether that's wildfires,
00:17:12
hurricanes, or severe storms and and
00:17:14
hail. Um those are areas where we are
00:17:17
seeing house prices respond. Now, these
00:17:19
are areas that have in general already
00:17:21
seen house prices rise quite
00:17:23
dramatically uh over the co housing
00:17:25
boom, but we estimate that they would
00:17:27
have risen, you know, maybe $20,000 more
00:17:29
had it not been for uh for rising
00:17:32
insurance costs. So, these insurance
00:17:34
costs are are really a pocketbook issue
00:17:36
for for households uh at the moment and
00:17:38
it is affecting asset values in a very
00:17:40
direct way. Let me finally touch on
00:17:43
this. It's seemingly the topic that
00:17:45
everybody talks about these days. Uh,
00:17:47
are you seeing a a significant impact
00:17:50
from AI in the real estate market right
00:17:52
now?
00:17:53
>> I think we're still in the early innings
00:17:55
when it comes to AI in real estate and
00:17:57
some of that is uh a question of of
00:18:00
organizing often uh messy and
00:18:02
complicated data sets whether that comes
00:18:04
from um you know if you think about a
00:18:07
multifamily uh owner who has information
00:18:10
on rents and vacancies also information
00:18:12
on expenses also interacts with their
00:18:15
with their tenants. I think we're seeing
00:18:16
AI at the sort of entering in where
00:18:19
you'd expect to the lowest hanging
00:18:20
fruit. So things like chat bots to to
00:18:23
manage maintenance requests. I think
00:18:25
that's kind of the early stages of this.
00:18:27
But when it comes to really building out
00:18:29
the functionality of AI for real estate
00:18:32
investing, whether that comes to making
00:18:34
portfolio decisions, um you know,
00:18:36
purchase decisions, um or renovation
00:18:38
decisions or or um or exit decisions, I
00:18:42
don't think we're there quite yet. Um, I
00:18:44
think there are some firms that are
00:18:45
leading the charge, but it it's still
00:18:47
very early stages when it comes to the
00:18:49
interplay between uh between AI and real
00:18:52
estate. But, you know, I'm teaching a
00:18:53
course this this spring, starting next
00:18:55
week, on real estate data analytics, uh,
00:18:58
which which I think of as the, you know,
00:19:00
the the the precursor to um to really
00:19:03
embedding AI into the systems when it
00:19:05
comes to real estate investing.
00:19:06
>> Going to going to drag you kicking and
00:19:08
screaming down that path, isn't it, Ben?
00:19:11
>> Far far from it. We love we love data
00:19:13
over here. There you go, Ben. Great to
00:19:15
catch up with you again. Thanks very
00:19:16
much. All the best. Look forward to
00:19:17
talking to you throughout the year.
00:19:19
>> Yeah, absolutely, Dan. It's always fun
00:19:20
to be here. Thanks.
00:19:21
>> You You got it. Ben Keys, professor of
00:19:23
real estate here at the [music] Wharton
00:19:25
School. Thank you for listening to The
00:19:27
Ripple Effect. We hope you found this
00:19:29
episode informative and engaging. Don't
00:19:31
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00:19:33
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00:19:36
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