00:00:00
rents of outpaced inflation basically
00:00:02
every year uh for almost 15 years now
00:00:06
and so you know with the growth of rents
00:00:08
we have many more households that are
00:00:10
constrained in terms of their monthly
00:00:12
income going towards rent and the
00:00:14
benefit of buying even at a high
00:00:16
interest rate right now is that it fixes
00:00:18
your housing costs uh in terms of the
00:00:21
principal and the interest components
00:00:22
that you're paying in a given year
00:00:23
welcome to the ripple effect the podcast
00:00:26
that takes you on a journey through the
00:00:28
minds of work and faculty I'm your host
00:00:30
Dan Loney and in each episode we'll be
00:00:33
diving deep into the inspiration behind
00:00:35
the groundbreaking research that Wharton
00:00:37
professors have conducted and exploring
00:00:39
how their findings resonate with the
00:00:41
world today pleasure to be joined by Ben
00:00:44
Keys professor of real estate here at
00:00:46
the Wharton School hi Ben great to talk
00:00:48
to you again yeah thanks for having me
00:00:49
Dan so let me start with the Zillow
00:00:52
announcement and should we be surprised
00:00:54
at what kind of impact might we see from
00:00:57
this type of a program it is interesting
00:00:59
because it's the potential of one
00:01:01
percent down but also Zillow potentially
00:01:04
contributing to the down payment as well
00:01:06
yeah it's an interesting business idea
00:01:08
for for Zillow to wade into this area
00:01:11
and offer this type of subsidy for
00:01:15
borrowers I think this is reflecting a
00:01:17
number of challenges in the housing
00:01:18
market right now but maybe the biggest
00:01:20
one from zillow's perspective is that
00:01:22
it's a volume based business and you
00:01:25
know zillow's mortgage revenue is down
00:01:27
about 17 year over year and the visits
00:01:30
to zillow's apps and websites have are
00:01:32
also down about eight percent year over
00:01:35
year and so as we think about what's
00:01:37
what these rate hikes are the effect
00:01:39
that the rate hikes are having on the
00:01:41
housing market the most obvious and
00:01:42
dramatic one is on volume the number of
00:01:45
transactions that are occurring and
00:01:47
Zillow is fundamentally a volume based
00:01:49
business and so they're looking for
00:01:51
innovative solutions uh to increase some
00:01:54
of that volume and I think of this down
00:01:56
payment program is one potential
00:01:58
direction for for them to innovate so I
00:02:01
I guess the other question I have is you
00:02:03
know we're not that far out I mean a
00:02:06
little bit more in a decade from the
00:02:07
housing crisis
00:02:09
which the marker of that was all of the
00:02:12
zero percent down mortgages that
00:02:15
occurred I mean we're talking about
00:02:16
going from zero to one potentially with
00:02:19
this program so is the sector is kind of
00:02:22
the housing base strong enough at this
00:02:26
point from where we were back in 2008 to
00:02:29
handle this type of a program
00:02:31
yeah I think it's natural to feel some
00:02:33
of the same Echoes of the the risky
00:02:37
loans that we saw in the mid-2000s that
00:02:41
were encouraging people to take on large
00:02:43
amounts of debt that they couldn't
00:02:45
ultimately manage and those kind of
00:02:47
loans had a number of characteristics in
00:02:49
addition to just low down payments they
00:02:51
often had teaser rates where the
00:02:53
interest rate would jump after a couple
00:02:54
of years or negatively amortizing loans
00:02:57
where the loan balance would actually
00:02:58
increase uh over time this is just one
00:03:01
margin uh along which we're seeing this
00:03:04
Innovation to this point I think it'll
00:03:06
be interesting to see if we see
00:03:07
Innovations on the other constraints on
00:03:10
households if you look at the overall
00:03:12
market right now you know the sort of 20
00:03:14
down payment for a house is actually a
00:03:17
myth and and actually the the median
00:03:20
down payment is about seven percent
00:03:22
right now in the housing market so low
00:03:25
into value ratio of about 93 is is the
00:03:28
median and this is because the FHA
00:03:30
offers a 3 three and a half percent down
00:03:32
program already and Feeney and Freddie
00:03:35
in trying to compete
00:03:36
um although these are again sort of
00:03:38
federal entities all competing with each
00:03:39
other they're offering a five percent
00:03:41
down program uh for for Fannie and
00:03:44
Freddie loans and so you know moving the
00:03:45
needle from five percent to three and a
00:03:47
half percent to one percent certainly
00:03:50
reduces that down payment constraint for
00:03:51
households but it doesn't relax some of
00:03:54
the other constraints that might be more
00:03:55
biting for households at the moment
00:03:57
so you mentioned the word Innovation and
00:03:59
obviously I think that becomes important
00:04:01
in the scope of a lot of different
00:04:03
business sectors how then does
00:04:06
innovation potentially
00:04:08
factor in and and what kind of level of
00:04:10
importance does it have do you think for
00:04:13
housing as it tries to kind of build a
00:04:16
lot of these elements back up build up
00:04:17
the supply kind of loosen up the refi
00:04:20
market and and and and try and spur the
00:04:23
level of growth even with these high
00:04:25
home prices we still see
00:04:27
well I think we're going to see a lot of
00:04:29
scrambling on the part of mortgage
00:04:32
lenders Brokers Realtors to try to find
00:04:36
some ways to juice volume from its
00:04:39
incredible low point and this is the
00:04:41
challenge the housing market is in a
00:04:43
deep freeze because interest rates have
00:04:45
risen so quickly and that the rising
00:04:47
rates have reduced demand uh as buyers
00:04:50
are going to be facing much larger
00:04:52
monthly payments and it's sharply
00:04:54
reduced inventory so few people want to
00:04:56
sell their homes they're happy to stay
00:04:58
put where they are right now with their
00:05:00
interest rates locked in at three
00:05:01
percent or even lower and so we're going
00:05:04
to see a lot of interesting uh efforts I
00:05:06
think uh and the question is whether any
00:05:08
of those efforts are going to really
00:05:09
move the needle on the deep freeze or
00:05:12
not we also have a housing market which
00:05:14
I don't think people fully appreciate
00:05:16
you know we nationalize the mortgage
00:05:18
Market between Fannie Mae Freddie Mac
00:05:20
and the FHA those three entities
00:05:22
dominate the the types of mortgages that
00:05:24
are issued the flavor of the mortgages
00:05:26
that are issued there they're almost all
00:05:28
30-year fixed rate mortgages and they
00:05:31
dominate the underwriting standards and
00:05:33
so credit scores are much higher than
00:05:34
they were in the in the early 2000s for
00:05:37
the average home borrower at the moment
00:05:40
and so I think when we're thinking about
00:05:41
this question of innovation we're
00:05:44
thinking about you know sort of
00:05:45
chiseling away at a giant Iceberg uh
00:05:47
that is the the housing market right now
00:05:49
and and right now these feel like a very
00:05:51
small chisel to me and it'll be
00:05:53
interesting to see whether there's more
00:05:55
ambition coming forward but when you
00:05:57
think of the term Innovation is the
00:06:00
housing sector one that has been
00:06:02
Innovative in general I mean when you
00:06:04
think about the process it's been fairly
00:06:07
similar decade after decade after decade
00:06:10
it seems like yeah the the The
00:06:12
Innovation process in the housing market
00:06:14
is extremely slow and if you think about
00:06:17
the different margins along which you
00:06:19
could innovate you know mortgage
00:06:21
contract design is one where there's
00:06:22
been a lot of discussion and I think in
00:06:24
the aftermath of the Foreclosure crisis
00:06:26
in particular there was a lot of concern
00:06:29
among policy makers and academics could
00:06:31
we design a better mortgage contract
00:06:34
that helped people on the downside and
00:06:37
avoided those kinds of costly
00:06:39
foreclosure sales and I think we're
00:06:41
seeing sort of the effects of of better
00:06:44
policy and this is one of the
00:06:46
consequences of that better policy so we
00:06:48
didn't have a foreclosure crisis during
00:06:50
covet and that was very much because of
00:06:53
policy choices made by state federal
00:06:56
state and federal entities we gave
00:06:59
people forbearance we allowed people to
00:07:01
stay in their homes we prevented
00:07:03
evictions from occurring and we
00:07:05
supported people with a lot of fiscal
00:07:08
support and all those things prevented
00:07:10
that big disruption to the housing
00:07:12
market and the consequence of doing so
00:07:14
is that now a lot of people are are
00:07:16
staying in place
00:07:17
um and so I think there was kind of a
00:07:19
trade-off there so you know I would
00:07:21
actually say that the the way in which
00:07:23
we helped people during covid was the
00:07:25
big policy innovation in the housing
00:07:27
market and now we have a new set of
00:07:29
problems and and we'll need to think of
00:07:31
new ways to innovate so what are some of
00:07:34
the ideas that potentially are out there
00:07:35
right now when you think about taking
00:07:38
the housing sector from where it is at
00:07:40
the moment to building it out over the
00:07:42
next maybe decade or two
00:07:44
well I think first we have to diagnose
00:07:45
what the problem is and this program by
00:07:48
Zillow is is really about increasing
00:07:50
demand it's about increasing a home
00:07:52
buyer demand home buyers who struggle to
00:07:55
save up uh you know for a large enough
00:07:57
down payment this program is going to
00:07:58
help them out the the problem in the
00:08:00
housing market right now isn't just
00:08:02
demand it's not a simple story of you
00:08:05
know no one wants to buy that's clearly
00:08:06
not the story because inventory is so
00:08:09
staggeringly low and let me give you
00:08:11
just a couple of numbers on the state of
00:08:13
inventory in the housing market in the
00:08:16
New York metro area at this time in 2016
00:08:19
there were about 70
00:08:20
000 active listening listings this month
00:08:23
there are only 32 000.
00:08:26
um in Baltimore there were 13 000
00:08:28
listings this month only 3 500. so the
00:08:32
number of homes for sale is far far
00:08:35
suppressed relative to where it was and
00:08:37
what we're learning is that interest
00:08:39
rate hikes seem to be affecting
00:08:40
inventories even more than they're
00:08:42
affecting demand and that's partly a
00:08:44
function of demographics partly a
00:08:46
function of the kinds of options that
00:08:48
different folks have and so going
00:08:50
forward kind of tying back around to
00:08:51
your question you know going forward and
00:08:53
thinking about uh what are we going to
00:08:55
see in the way of innovation uh in the
00:08:57
coming years first we need to understand
00:08:59
the problem and if the problem is
00:09:00
inventory then it's one about how do we
00:09:02
encourage more construction how do we
00:09:04
get more units built and made available
00:09:07
for sale and then on top of that it's
00:09:09
how do we get people to re-optimize to
00:09:12
shift out of a house that they may feel
00:09:14
locked in with these low interest rates
00:09:17
that they've locked in and how do we get
00:09:18
them to move and that's a much trickier
00:09:21
not to untie so when you talk about the
00:09:25
factor of of the home builders uh don't
00:09:29
you also have to factor in not only the
00:09:32
numbers of houses that are being built
00:09:34
but the types of properties that are
00:09:35
being built I mean we see a lot of
00:09:38
properties that are the four and five
00:09:40
bedroom house that are built for you
00:09:42
know 500 600 700 thousand dollars and
00:09:46
you see a lot of multi-family properties
00:09:48
the town homes the apartments Etc
00:09:51
but have we kind of placed out of the
00:09:54
market the single family two hundred
00:09:56
thousand dollar or 250 000 three bedroom
00:10:00
one and a half bath house in this
00:10:03
marketplace right now
00:10:04
oh for sure the starter homes that we've
00:10:07
seen uh built in the past are just not
00:10:10
being built and the way that they used
00:10:11
to be built and so you know we are in
00:10:13
the midst of a bit of a construction
00:10:15
boom and I'm I'm cautiously optimistic
00:10:18
in in hearing from the home builders
00:10:19
especially this quarter
00:10:21
um the home builders have uh in their uh
00:10:24
in their commentary
00:10:26
um said that they are looking to acquire
00:10:28
more land and to to build more units but
00:10:30
I think you're right that it's it's very
00:10:32
uneven and the housing market has never
00:10:34
been one size fits all but it feels that
00:10:37
much more idiosyncratic at the moment
00:10:38
you have certain parts of the country
00:10:41
um like I was referring to um to the
00:10:42
east coast markets of New York and
00:10:44
Baltimore where inventory is extremely
00:10:46
low in some other markets you're seeing
00:10:48
a boom in inventory New Orleans for
00:10:50
example has inventory levels that have
00:10:51
skyrocketed back up to their 2016 levels
00:10:54
and we're seeing price softening
00:10:56
occurring there and so I think you know
00:10:58
one of the challenges is is sort of for
00:11:00
policy makers is thinking about you know
00:11:02
what are some of the policies where we
00:11:04
can uh relax the constraints in the
00:11:05
places that need it and I think the
00:11:07
challenge there is you say okay well
00:11:09
we're gonna you know subsidize the home
00:11:10
builders where will they go They're
00:11:12
going to go to some open track in Texas
00:11:14
where it's easy to acquire land it's
00:11:16
easy to Zone the land
00:11:18
um and and it's easy to throw up housing
00:11:21
and they're not going to go
00:11:22
um you know into into some of these
00:11:24
cities in the Northeast that are much
00:11:26
more dense there's not a lot of land
00:11:27
available uh where the zoning is is much
00:11:29
tighter and so I think that's one of the
00:11:31
tensions that the housing market is
00:11:33
facing right now is that if you have a
00:11:35
sort of oversimplified solution to our
00:11:38
housing Supply crisis it's going to be
00:11:40
applied to the wrong Market
00:11:42
how do you think also that the dynamic
00:11:44
of the online entity like Zillow and and
00:11:47
other entities out there
00:11:49
have the opportunity to really kind of
00:11:51
shape what the the the industry is going
00:11:54
to look like over the next couple of
00:11:56
decades
00:11:57
yeah well the the industry has certainly
00:11:59
shifted to having a much stronger online
00:12:01
presence as we've said before you know
00:12:03
housing markets move slowly um they're
00:12:05
extremely durable assets
00:12:07
um and they use a lot of antiquated
00:12:09
systems uh in uh in the way in which
00:12:12
transactions occur I think the way in
00:12:14
which we're seeing a rise of fintech uh
00:12:17
mortgage lenders so we're seeing more
00:12:18
Innovation on the mortgage underwriting
00:12:20
through through some of the fintech
00:12:22
tools we're seeing more certainly in
00:12:25
terms of the way people shop for houses
00:12:26
shopping online or in some cases during
00:12:29
covid not even visiting the property
00:12:31
before making an offer so I think we're
00:12:33
definitely seeing some action there I I
00:12:36
think again it comes back to the size
00:12:37
and scale of the U.S housing market the
00:12:40
market is enormous and thinking about a
00:12:43
lot of these fintech players right now
00:12:45
they're carving off relatively small
00:12:47
slices of a giant market it's extremely
00:12:49
profitable to do that you can run a
00:12:51
great business doing so but it doesn't
00:12:53
shift the the overall tenor of the
00:12:55
market and I think one of the myths that
00:12:57
we're hearing going around right now
00:12:58
about you know the role of
00:13:01
um you know a few large institutional
00:13:03
buyers uh sort of steering the the
00:13:05
overall U.S housing market in One
00:13:07
Direction or another they're just not
00:13:09
big enough players to have that kind of
00:13:11
imp and so you know they may have an
00:13:13
impact on on a subset of neighborhoods
00:13:15
certainly you know the suburbs around
00:13:17
Phoenix or the suburbs around Atlanta
00:13:19
may have had some pretty big effects
00:13:21
from uh you know the push towards
00:13:23
single-family rentals for instance but I
00:13:26
think at a national scale they're just
00:13:28
not there at the moment and they might
00:13:30
never get to that scale because of how
00:13:32
big the market is well and that
00:13:34
component of the rental house market
00:13:36
which uh you know has kind of I think
00:13:39
has kind of fluctuated in terms of the
00:13:42
want by the consumer over the course of
00:13:43
time obviously in in the last couple of
00:13:45
years it's it has grown because of the
00:13:48
Dynamics we've seen at play
00:13:50
is it beneficial longer term to see that
00:13:54
fluctuation on the rental component of a
00:13:56
single family home in terms of being an
00:13:59
available component there if somebody
00:14:01
needs it but also allowing them with
00:14:04
these programs like Zillow and others
00:14:06
with the load down payment option
00:14:08
to have them have the ability to be able
00:14:11
to get in and own that property and have
00:14:13
that equity in their in their kind of
00:14:16
their Hip Pocket yeah I think this was
00:14:18
exactly what people expected to happen
00:14:20
coming out of the financial crisis uh of
00:14:22
2008 after the wave of foreclosures that
00:14:25
we saw a lot of these properties were
00:14:27
scooped up uh to become single family
00:14:29
rentals and there was an expectation
00:14:31
that that just wouldn't last that that
00:14:33
eventually those portfolios would be
00:14:35
wound down by selling those homes to
00:14:37
owner occupied residents so you'd see a
00:14:41
rebound of homeownership and we haven't
00:14:43
gotten back to those levels of home
00:14:45
ownership rates where we were at the
00:14:47
peak in 2005 or 2006 we're still well
00:14:51
below that point so many more renters
00:14:53
than homeowners at the moment and a lot
00:14:56
of those folks are in these single
00:14:57
family rental units I think it's an open
00:14:59
question whether that's a function of
00:15:01
preferences or or constraints I think it
00:15:03
does add some flexibility and it it does
00:15:06
lower some of the costs for for
00:15:08
households that don't need need to worry
00:15:09
about some of the associated risks of
00:15:12
home ownership but at the same time it
00:15:14
doesn't give them a potential tool for
00:15:16
for wealth building or an asset to
00:15:18
borrow against or potentially uh you
00:15:21
know another sort of way in which they
00:15:24
can um build a deeper sense of community
00:15:27
as a homeowner so I think all of those
00:15:29
things point to some of the trade-offs
00:15:32
as we see is certain communities
00:15:34
becoming much more renter oriented
00:15:36
rather than owner organ so by having
00:15:39
these types of programs that we've kind
00:15:41
of mentioned here with the lower down
00:15:43
payment element uh you're obviously
00:15:45
shortening up that window uh that the
00:15:48
potenti that the buyer is thinking about
00:15:51
in terms of getting that down payment
00:15:52
for them does it also potentially have
00:15:56
an impact down the road in terms of that
00:15:58
person for that second house like that
00:16:01
next step they've they they do this on
00:16:03
the first house but it the benefit
00:16:05
financially helps them down the road as
00:16:07
well that's a great question it depends
00:16:09
on what the path of house price
00:16:11
appreciation looks like and how quickly
00:16:13
they're able to build up equity in the
00:16:16
home so if they're getting in at the
00:16:17
right time and this is a time where
00:16:18
prices are going to you know continue to
00:16:20
rise then they're going to see their
00:16:22
Equity build much faster than if they
00:16:24
had to wait a few years to get into the
00:16:26
market so it becomes really a market
00:16:27
timing story for that next asset you
00:16:30
know right now Zillow has only rolled
00:16:32
out this program in in parts of Arizona
00:16:34
so it's still small potatoes at a
00:16:37
national scale and I think you know
00:16:38
that's a market where you know you
00:16:40
wouldn't necessarily expect prices to be
00:16:42
on on a sharper upward trajectory in
00:16:45
coming years because there is a lot of
00:16:46
new Supply coming online so houses are
00:16:49
still being built in those areas and you
00:16:52
know I wouldn't expect that this would
00:16:53
be a sort of a path to to Great uh you
00:16:56
know great dynastic wealth over getting
00:16:58
in you know a couple a couple years
00:17:00
earlier than you otherwise would but for
00:17:02
some households that could make quite a
00:17:04
difference well and it also made me
00:17:05
wonder as you were saying that whether
00:17:07
or not at least right now with them try
00:17:08
trying this in Arizona if whether or not
00:17:11
this may end up being somewhat of a
00:17:13
market specific idea that would work in
00:17:17
lower home priced marketplaces rather
00:17:20
than as you said the New York's uh the
00:17:23
DC area here in Philadelphia uh up in
00:17:26
New England in in Boston as well
00:17:29
yeah I mean we think of those as the
00:17:31
high priced markets where there are more
00:17:32
people constrained but in every Market
00:17:34
in the country there are renters who
00:17:36
would love to buy right now and one of
00:17:38
the themes that we haven't brought up is
00:17:40
you know just how much more expensive
00:17:42
it's become to be a renter in the United
00:17:44
States since 2010. rents have outpaced
00:17:47
inflation basically every year uh for
00:17:50
almost 15 years now and so you know with
00:17:53
the growth of rents we have many more
00:17:55
households that are constrained in terms
00:17:57
of their monthly income going towards
00:17:58
rent and the benefit of buying even at a
00:18:01
high interest rate right now is that it
00:18:03
fixes your housing costs uh in terms of
00:18:06
the principal and the interest
00:18:07
components that you're paying in a given
00:18:09
year so there's still a pool of renters
00:18:11
that are out there who would love to own
00:18:13
and I think in those markets the sort of
00:18:16
um lower priced uh markets we we may
00:18:20
still see a group of people who would
00:18:21
really benefit from relaxing this down
00:18:23
payment constraint I think they will
00:18:25
still face challenges related to their
00:18:27
credit scores and their debt to income
00:18:29
ratios whether they can make the monthly
00:18:31
payments each month but realistically
00:18:33
we're still looking like a process
00:18:34
that's going to take a few years for a
00:18:36
lot of this to play out partly because
00:18:39
just on the purchase side of it we've
00:18:41
got mortgage rates that are above seven
00:18:43
percent I think the expectation is
00:18:45
they're not going to come down
00:18:46
significantly uh in the next year or two
00:18:49
uh and then you have that Dynamic of
00:18:52
Supply that obviously is it you can't
00:18:54
fix that overnight as well that's
00:18:56
exactly right I still think we're in the
00:18:58
early phase of a deep freeze of the
00:19:01
housing market there's so many
00:19:03
homeowners who are sitting on three
00:19:05
percent mortgages or below and that's a
00:19:07
big Financial friction if you want to
00:19:09
give up that mortgage and move somewhere
00:19:11
else so I think that's going to have a
00:19:13
big impact mortgage applications are
00:19:15
down uh basically cut in half since 2021
00:19:18
due to the effect of of rate hikes and
00:19:21
so I think the market is going to
00:19:23
struggle along for some time as it
00:19:26
gradually Works its way through these
00:19:28
large Financial frictions that we
00:19:30
haven't seen in the housing market in a
00:19:32
long long time
00:19:33
Ben always great to get your Insight on
00:19:35
all of this thanks very much yeah thanks
00:19:37
so much for having me
00:19:39
benkey's real estate Professor here at
00:19:41
the Wharton School thank you for
00:19:43
listening to the ripple effect we hope
00:19:45
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00:19:47
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00:19:49
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