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