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