00:00:00
well the Midwest we see a 5% growth and rents and that's Market rents and that's
00:00:07
because it's affordable so what's happening right now is that the markets
00:00:12
that we saw the biggest run-ups in the south Florida Texas are um now not affordable anymore welcome to the ripple
00:00:21
effect the podcast that takes you on a journey through the minds of work and faculty I'm your host Dan Looney and in
00:00:28
each episode we'll be diving deep into the inspiration behind the groundbreaking research that Wharton
00:00:33
professors have conducted and exploring how their findings resonate with the world today well how much is the housing
00:00:40
sector impacting the higher levels of inflation that we're seeing in the economy right now pleasure to be joined
00:00:46
here in Studio by Susan wer professor of real estate here at the Wharton School great to see you again how are you good
00:00:52
to be here thank you that I guess is one of the bigger questions right now in terms of the economy is just how much
00:00:59
housing is actually playing into this how much do you think there is a a component of housing into the level of
00:01:04
inflation housing right now is a major contributor but it isn't the only contributor so we can't depend on
00:01:12
housing and rent prices taking us out of this inflation surge is the expectation that lower
00:01:20
pricing would see some sort of relief or absolutely yes because rent is 40% of the CPI and uh it particularly affects
00:01:31
uh owner occupied housing is part of the CPI index and it has been a significant part
00:01:39
of the CPI increase but recently it's actually outside of the housing sector
00:01:46
that we see a reacceleration of inflation so even with a decline in rents and we do see a decline in rents
00:01:55
in fact in most markets rents are flat do deine mining with the exception of the Midwest we can come back to that so
00:02:03
there is some relief to come in the CPI and the pce less OPC CPI has more housing in it some relief to come but
00:02:14
that will not take us down to the 2% desired inflation because we actually see the super core CPI increasing in the
00:02:25
last three months at a rate north of 7% and that's Le leaving housing out you
00:02:32
mentioned about the lowering uh costs in in certain parts of the country but the
00:02:37
Midwest not so much why so is the Midwest not maybe seeing as much well the Midwest we see a 5% growth and rents
00:02:45
and that's Market rents and that's because it's affordable so what's
00:02:50
happening right now is that the markets that we saw the biggest run-ups in the south Florida Texas are um now not
00:03:00
affordable anymore and we're seeing declines in those markets is also a surge in Supply in those markets in part
00:03:08
response to the to the increase in demand which drove prices up and that Surge and Supply is also holding rents
00:03:15
down so we will see some relief in the South but as we can see the Midwest not and overall prices are rising at a
00:03:24
significant rate which feeds into inflation which feeds into interest rat rates which feeds into mortgage rates
00:03:32
and in this conundrum that the FED is struggling with right now the higher the mortgage rates the more likely that
00:03:40
supply and housing will be constrained as homeowners are locked in they're not
00:03:45
giving up their 3% mortgages for a 7% mortgage which was which the fed's interest rate translates into is the
00:03:53
expectation though uh uh that the types of rates we saw a couple of years ago when we did see that run on refinancing
00:04:01
where mortgage rates were down to three three and a qu% I think the expectation is that's not coming back and it's
00:04:08
trying to find that sweet spot right now uh whatever that number is in terms of mortgage rates that will actually start
00:04:15
the the normal type of activity that we've seen in the past we're not going
00:04:19
to see 3% that's those and 0% near 0% real for the treasury that's in our past
00:04:26
right what we're hoping for is as in inflation comes under control we can get
00:04:32
closer to the historical average of mortgage rates which is 5% even at 5% we'll see people holding on to that 3%
00:04:41
mortgage so ultimately what's keeping rents up is uh despite the decline in demand is lack of Supply coming from two
00:04:49
sources lack of Supply from inventory people are locked into their homes because of low mortgage rates and also
00:04:56
it's costly to produce new supplies so Construction is costly and interestingly
00:05:02
enough we also have another headwind which is that the Rental Supply which increased is now decreasing there's a
00:05:12
glut in the market which is why we're seeing rents decrease in some markets there's a glut in the market and that
00:05:18
should help inflation that should get inflation under control for a time because that glut will be absorbed and
00:05:26
once that's absorbed then we will see uh housing R prices rise again rents rise
00:05:32
again so there's kind of a window for the FED action to get us closer to normal mortgage rates and interest rates
00:05:39
and bring us back to normaly and that's to about the end of 2025 when we'll
00:05:44
start seeing rents rise again because this glut will be absorbed yeah it's interesting you talk about the Midwest
00:05:51
uh one of the components that I I watch is K Schiller with the 20 City index and
00:05:57
the most recent numbers again showing San Diego has been one of those cities that seemingly has seen a lot of
00:06:03
year-over-year increase Chicago and Detroit were two of the Cities noted as seeing the highest year-over-year
00:06:09
increase which I don't remember seeing those two particular cities in this mix
00:06:14
at that high a level so that it's not just the rental price it seems like but
00:06:18
it's also the housing prices in that region a search for affordability a search for affordability with a job
00:06:25
market and Chicago qualifies it's affordable Midwest is affordable the South which has historically been south
00:06:33
and west southwest historical and with job growth it's less affordable so will
00:06:38
we see another bump up of housing prices then probably before we see things slow
00:06:43
down I I mean we saw such a rush in 2021 and 2022 where prices went up and then things seemed to like level off a little
00:06:50
bit but it feels like maybe we're getting ready for another bump up it all depends on the overall economy we see in
00:06:57
the most recent numbers the overall economy is slowing and also it depends on affordability we
00:07:02
now are at affordability constraints for many households so they can't afford the
00:07:08
housing so they can't demand the housing I think that the consensus for this
00:07:12
coming year is that housing prices will increase but perhaps at a about the inflation rate assuming that G&P is
00:07:20
under is declining in growth rate as we've seen in the most recent quarter if
00:07:27
we don't see that deceleration in the G&P growth rate it will absolutely heat
00:07:32
up the housing market and despite the high mortgage rates because with employment there is a need to move to
00:07:40
New housing maybe it's in the Midwest and there is uh still Millennials are at
00:07:45
the there we still have Peak Millennials are still looking to come out of their fam's home you know we have 50% of young
00:07:51
adults it's a it's back at record gr depression levels in recent research
00:07:55
that we did 50% of young adults are living at home and they and their parents are looking for them to go out
00:08:02
independently which will increase the demand put more pressure we have a supply shortage we have pent up demand
00:08:09
from a policy perspective do you have to start to look at some of these issues and maybe it's affordability maybe it's
00:08:15
Supply where policy may be able to help the process out along here yes I think there is a new look at the importance of
00:08:23
policy particularly at State levels States across the country are experimenting with ways to ease up the
00:08:30
supply of developable land and to be able to do that then they have to work directly with the builders and the local
00:08:36
communities to be able to kind of open some of these doors right that's the way
00:08:40
forward what's the expectation then that you have for the problems that we're
00:08:45
having right now with the housing market and what we need to kind of think in terms of a plan moving forward over the
00:08:52
next couple years to be able to to bring the housing market back into alignment well first this really is mortgage rates
00:08:59
and mortgage rates aren't going to come down until inflation and the overall
00:09:02
interest rate comes down because otherwise uh rental is is more affordable but rental isn't that
00:09:08
affordable either in most markets rental is more affordable so but still not that
00:09:12
affordable and in fact we see it in the percentage of young adults Millennials who are renting versus owning if you
00:09:20
look at the individual quote unquote home ownership or individual as opposed to the overall we see onethird of young
00:09:27
adults uh living at not living in owner occupied either living with her parents or living at renting which is
00:09:35
significantly lower than previous generations so what's the answer the answer is first and foremost getting the
00:09:42
mortgage rate down so that people can become owners and that is going to ease up the pressure on the rental market as
00:09:50
well that's one of the contributors to high rents is those who are priced out
00:09:55
of the owner occupancy market and only can be in the rental market and the second is a longer run societal issue
00:10:03
which is increasing the supply and the potential to supply housing whether it's
00:10:08
rental or owner occupied especially starter homes one of the things that I guess has kind of been priced out of the
00:10:16
housing market uh are those homes newer homes in kind of that 200 to $300,000 category it seems like every time you
00:10:24
see a development going up of new homes you're talking about 400 $500,000 which obviously is a challenge
00:10:30
for a lot of people and it sure is going to be a challenge as you said with younger Generations who in many cases
00:10:35
are living uh as still at home at this point yeah it's very difficult to have a
00:10:40
$80,000 I mean there have been trillions of dollars of wealth created for those who already own their home right but for
00:10:49
those who are looking to buy or rent uh coming up with tens of thousands of dollars is no easy task so yes starter
00:10:58
homes there is Builders are in fact moving in this direction homes are getting smaller but it's less profitable
00:11:05
to produce on the starter home than the luxury Market overall and there needs to
00:11:10
be that ability to increase the supply of land that is developable near infrastructure near jobs in communities
00:11:19
that are and in states that are willing to go in this direction and then you're
00:11:23
also seeing uh from the fact that we have such higher interest rates right now I I think the expectation is even if
00:11:31
they do come down they're going to come down marginally not anything significant
00:11:35
so if you're out there buying a home don't you almost have to kind of ride
00:11:39
the wave a little bit of thinking about maybe going in with a mortgage at like maybe six and 3/4 percent and then if
00:11:45
you does go down to like six and a quarter then start to think about the refi and kind of riding this wave of a
00:11:51
different kind of wave of refi than we had a couple of years ago well that's
00:11:54
the hope for those who are buying with mortgages today is that refi is in their future at up you know 6% down from 7%
00:12:02
that helps out a lot but the major buyers today are buying many without a mortgage because again uh 7% is daunting
00:12:11
and the expectation of what you're buying to a degree has changed in terms of the process of going through it in
00:12:18
many cases you're talking about no inspections uh that are required to you know to buy a house the dynamic of what
00:12:24
you would normally do to buy a house has certainly changed it seems like yes and
00:12:29
you know the relief unfortunately would come with the slowing of the economy right and the slowing of the economy is
00:12:34
a is a double-edged sword on the one hand rents will ease up owner occupied housing prices will ease up but incomes
00:12:42
then will decline as well so that isn't a good solution for affordability it
00:12:46
also seems like that the the push to build uh multif Family Properties which has been so strong in the last decade or
00:12:54
so that seems like that's continuing that's where Builders believe their
00:12:58
bread and butter is going to be at least for the foreseeable future and there's
00:13:02
the need again Peak Millennials but the glut in the market right now is going to
00:13:07
slow supply for the next year or so great to see you again Susan thanks very much pleasure Susan wer professor of
00:13:13
real estate here at the won school thank you for listening to the ripple effect we hope you found this episode
00:13:19
informative and engaging don't forget to subscribe and leave us a review so that
00:13:24
we can continue to bring you the best Insight from the warden School [Music]