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Welcome to This Week in Business, a Wharton School podcast delivering the latest business trends
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and insights. Join us every Wednesday and Friday for fresh perspectives from Wharton's world-class
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expert faculty. Whether you're an executive, entrepreneur, or business enthusiast,
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this podcast keeps you informed and inspired. Let's dive in. And hi everybody and welcome to the show. I'm Dan Loney. In just a moment, we will be speaking
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with Wharton real estate professor Ben Keyes about the passage of the housing bill in Congress
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recently and just how good it is, how much does it really improve the housing sector, and what
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still needs to be done even with it potentially in play down the road. But first, a look at today's
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business headlines. The latest inflation survey by the New York Fed shows that consumers don't
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see prices coming down anytime soon. Median expectations in the June report showed a jump
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to 3.7 percent, the highest since September of 2023, and those expectations over the next three
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years also climbed to 3.3 percent. That's the highest since June of 2022. Healthcare and rent
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costs are the two most impactful elements that people are still concerned about. Toyota is going
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to invest $3.6 billion to move production of its Tacoma midsize pickup truck from Mexico
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to San Antonio, Texas. The funds will look to expand a facility that already produces the
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Tundra full-size pickup and the Sequoia SUV hybrid. The investment is part of an overall
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$10 billion plan to expand operations in the U.S. by the year 2030. And California-based burger chain
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In-N-Out Burger is expanding again with six new locations in five states. Two are located in its
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home state of California, along with Utah, Idaho, Arizona, and Tennessee. But expansion remains under
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some levels of control. CEO Lindsey Snyder Ellingson said back in March that the company
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would not be expanding anytime soon to the East Coast, as well as canceling the idea of online
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ordering and pickup. Recently, the House and the Senate passed a bill that deals with the topic of
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housing affordability. It's something that many people know is a serious problem here in the
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United States right now. Unfortunately, even with that bill being passed, it was held up by the
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White House, part of wanting to pass the Save America Act. Still, the bill looks to try and
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address, as I said, some needed issues. And we're going to talk about those issues in the housing
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sector with Ben Keyes, who's Wharton's real estate professor. Ben, great to talk to you. How are you,
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sir? I'm doing well. Thanks for having me, Dan. So, obviously, you and I have talked about housing
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affordability. And I guess from that perspective, does this bill, taking the politics out of play
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for a moment, does the bill start to address some of the issues that you and I have talked about
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over the years? Yeah. Well, I wish we could take the politics out of this. This is an exciting
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bipartisan bill that I think is a clear recognition of the housing affordability challenge in America.
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There's a true recognition from this bill that this is a priority for American households,
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that the cost of housing, either for homeowners or for renters, has gotten way too high. And you
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can benchmark that to house prices as a proportion relative to annual household incomes,
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which has essentially doubled since the 1950s. You can look at this in terms of rental burdens,
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where 25% of all renters in the U.S., that's more than 10 million households, pay more than 50%
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of their income each month towards their rent. So, I think this bill represents a true recognition
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of that problem. And I think it lays the groundwork for some transformational efforts
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to improve housing affordability. But it's just one very small step in a much longer path.
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All right. So, on the cost perspective, how does this bill look to address the pricing component?
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So, I think there's a few elements of this bill that could address the high cost of housing. Now,
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all of these elements of the bill sort of have to work in concert. I view this bill a bit like
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a buffet. It's sort of, there are a lot of different directions that you could go. And
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there's very little funding attached to the bill, which we're going to talk more about in just a
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second. But when you combine some of the individual elements, you can put together
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what looks like a pretty nice plate when it comes to addressing some of the issues of housing
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construction. So, there's elements here that are going to convey best practices when it comes to
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zoning and building codes. There are elements that are going to streamline some of the review
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processes. There's additional financing tools. There's a number of pilot programs and an
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innovation fund. And if you put all of those elements together, you can start to see a path
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where there's going to be more federal support and more federal financing for some local efforts
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to get more buildings built. So, what does this, how does this change the dynamic for builders?
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And I ask that because you and I, and I've, I think I've asked you this several times.
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It feels like we are and have been for a long time in a spot where we're still building houses,
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but maybe we're not building the right type of houses. And maybe we need to start to think about
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the starter home once again, and whether or not that's something that can be kind of brought back
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into the mix here. Yeah, I think the bill does a number of things, especially on the manufactured
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housing side. So, when we think of manufactured housing, that's going to be an especially
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smaller type of housing that tends to be for the lowest income homeowners. There, we're going to
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see some additional regulatory relief when it comes to the design of manufactured housing and
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the ways in which they're built. There's a pilot to expand small dollar loans. And so, one of the
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challenges has been getting financing for these types of projects. Then there's a broader set
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of tools that are being put forward to shorten local permitting processing times and adopt
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pre-approved designs for certain, you know, for certain permit approval. So, all of those
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elements could lead towards improvements in the creation of starter homes. And I saw that
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one of the components also in there is, and you talked about the speeding up of the process,
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is also the speeding up of the process of environmental review as well to see, make sure
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you can build on certain lands, I guess, correct? That's right. So, I think environmental review is a
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very important concept, and it should be applied appropriately. But I think there's a number of
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projects that do get tied up in environmental review processes and the sort of NIMBY, not in
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my backyard movement that finds these different hooks to latch on to and slow down, you know,
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slow down development processes where they're not in favor of it. Often, the environmental review is
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one of those hooks that they're able to latch on to. And so, you know, I think there's a number
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of common sense reforms in this bill that don't actually go that far, but I think go in the right
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direction towards saying, hey, let's be sensible and reasonable when it comes to the amount of
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environmental review necessary for, say, infill multifamily housing development, by which I mean
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it's sort of already on a street grid. There's already buildings surrounding it. So, what are
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the environmental impacts of building one more apartment building in a neighborhood that already
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has many of them? I think some of those modifications could streamline things quite a bit.
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One of the topics that's been talked about a lot is also that of the institutional investor
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and seemingly people or companies from that group buying up just a ton of properties and that
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making it a greater challenge. Is that going to be addressed in this? So, it is addressed in this,
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but it's in an interesting way and it may have perverse consequences. We'll see how this plays
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out. So, one of the things that they put in the bill was a limitation that corporate buyers can't
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acquire a portfolio of more than 350 single family homes in the U.S. And taken in a vacuum,
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that sounds like, well, great, there's this opportunity for homebuyers now that the
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corporate market is going to step aside. But it doesn't seem to do much with the existing firms
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that already own many multiples more than 350 units. It seems, at least on its face,
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to grandfather in those big players like Invitation Homes, which owns over 80,000 houses
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across the U.S. American Homes for Rent, AMH, owns about 60,000 homes. The bill doesn't seem
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to touch them. And if anything, it might give them a competitive moat from new players coming
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into the space. And so, I think some of those elements in the bill, the corporate ownership
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elements, they got outsized attention because there's a very, I think, vocal group of people
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who are upset about corporate ownership of real estate and especially these big players.
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But I'm not sure that the bill is designed in a way to really address the tension there. And it
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may actually provide greater competitive strength to the players who are already in before and are
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grandfathered in based on this bill. How long then, once this bill does get through, and I think we
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assume it will at some point, would it take to really get some of these elements up and running?
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Because it would feel like in any kind of marketplace, you're still going to need some time
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to ramp up a lot of these components, correct? Absolutely. And this bill is called the Road
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to Housing Bill, and this is where the rubber meets the road. It's going from the potential
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elements of this bill, which I think really do have the potential to be influential,
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to today's political realities. And when you look at the different elements of this bill,
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a lot of the elements of the bill require work being done by either HUD or the FHFA.
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There's many elements in the bill that say, well, we're directing HUD to do this, that, or the other.
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But if you look at this administration's proposed budget for FY27, they're proposing cutting $10
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billion from HUD, about a 13% decrease in HUD's financing. And so you're going to give HUD all
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these additional tasks, but not actually give it the funds to do these things. The FHFA is also
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tasked with doing a number of things, but just this year, they've lowered their expectations
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for affordable housing, especially to low-income and minority-dominated communities. And so what
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you need for a bill like this to be successful is it needs to be funded, and it needs to be
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functional. And I'm skeptical of both of those things, especially with the other cost drivers
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that this administration is putting more pressure on. And so when we have tariffs,
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which are raising the cost of materials, when we have an immigration policy, which is reducing
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the available labor for the construction industry, and that's a story we're going to be hearing more
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about in the coming months, and we look at the high financing costs, we've seen those 10-year
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interest rates rise sharply in the wake of what's happening in the Middle East. And so mortgage
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rates are stubbornly high at 6.5. And so when you look at the costs for construction,
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financing as well, all of those elements are pointing against this bill having any
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short-term impact. Beyond what is in the bill, what are some of the other areas that you think need to be addressed
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at some point down the road, I guess? Yeah, I think there's a few other things in the bill that are exciting and that could
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grow into something bigger. One is this whole home repair act. So when we think about the
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housing market, we often spend a lot of time thinking about the new units that are coming
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online, but not about the old units that are falling into disrepair and falling out
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of the housing market. And one of the efforts actually from Philadelphia's own Nikhil Saval
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in the state of Pennsylvania was to create this Home Repairs Act that would provide grants or
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forgivable loans to help especially lower-income owners repair their homes. That's now being
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introduced at the national level. I think that has some true potential if it can be
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scaled up. So that's an element that I'm excited about. I think there's other ideas related to innovation funds and offering a mix of carrots and sticks
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to increase supply. On the carrot side, I like this idea of a fund that's going to be
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a competitive grant program that's going to look for communities that are innovating and
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try to support those innovations and then hopefully scale them up. So I think there's
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real promise there. I think on the carrot side, this is a bill that doesn't really
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change the basic supply and demand when it comes to the housing market and where local
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control dominates. And so thinking about different ways to incentivize local governments to change
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their building codes, to change their zoning codes, I think that's a much larger, more
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ambitious project that this bill doesn't take on. Ben, always great to talk with you. Thanks very much for your time today.
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Absolutely. Thanks so much for having me, Dan. You got it. Ben Keys, Wharton real estate professor joining us here on the show.