00:00:00
Ben Keys: Well, we're in the
midst of an affordability crisis
00:00:02
in the United States when it
comes to homeownership. Between
00:00:05
high interest rates and high
house prices, it's a very
00:00:09
challenging time to enter the
housing market. So I think we're
00:00:12
seeing, especially from the
millennial generation that is
00:00:15
reaching those peak home buying
years, feeling that they're priced out of
00:00:18
a lot of the neighborhoods and
even a lot of the cities that
00:00:20
they'd like to be homeowners in.
And so I think this is raising,
00:00:24
as you said, up to the level of
one of the most important issues
00:00:28
on people's minds is the
unaffordability of housing.
00:00:31
Dan Loney: Welcometo The Ripple Effect,
the podcast that takes you on a
00:00:35
journey through the minds of
Wharton faculty. I'm your host,
00:00:38
Dan Loney. And in each episode,
we'll be diving deep into the
00:00:41
inspiration behind the
groundbreaking research that
00:00:44
Wharton professors have
conducted, and exploring how
00:00:47
their findings resonate with the
world today. Loney: Well, certainly
00:00:50
there are a lot of questions
around the real estate market
00:00:53
right now, one of which is the
decision of whether to buy or
00:00:56
rent. Pleasure to be joined here
in studio by Ben Keys, Wharton
00:00:59
Real Estate Professor. Good to
see you, Ben. How are you?
00:01:02
- I'm doing great. Thanks.
00:01:04
- I guess I never thought that
this was going to be such an
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important question. But it seems
like it's becoming top of mind
00:01:10
for a lot of consumers trying to
make that decision of which type
00:01:13
of property they can afford, and
they want to live in right now.
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- Well, we're in the midst of an
affordability crisis in the
00:01:19
United States when it comes to
homeownership. Between high
00:01:23
interest rates, and high house
prices, it's a very challenging
00:01:27
time to enter the housing
market. So I think we're seeing,
00:01:29
especially from the millennial
generation that is reaching
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those peak home buying years,
feeling that they're priced out of a lot
00:01:36
of the neighborhoods and even a
lot of the cities that they'd
00:01:38
like to be homeowners in. And so
I think this is raising, as you
00:01:42
said, up to the level of one of
the most important issues on
00:01:45
people's minds, is the
unaffordability of housing. - And
00:01:49
so I think for a lot of people
when they're younger, and
00:01:52
they're thinking about where
they want to live, they probably
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make the decision, okay, I'm
going to rent first. So maybe I
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can build up some equity and be
ready to have the downpayment.
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But with some of the dynamics of
the economy right now, that's a
00:02:04
challenge to do that, especially
when rents have kind of risen
00:02:07
the way they have the last few
years. - Yeah, that's
00:02:09
right. If you think about the
challenges that this generation
00:02:12
has faced, at first, it's the
sort of uncertainty in the labor
00:02:15
market coming out of the
financial crisis. So a lot of
00:02:19
this generation was hitting the
labor market in exactly those
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weak economic years. Those are
difficult years to build up a
00:02:28
downpayment. They're also
difficult years to have a job
00:02:31
that has that predictable income
that's going to support making a
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long term commitment to a
mortgage. And so it's only after
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you sort of have had the chance
to save up for a down payment,
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and then you also have that
type of income stability, that
00:02:43
you begin to have the confidence
to become a homeowner. And what
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we're seeing is a significant
delay for this younger
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generation, that at the same
point, previous generations had
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substantially higher
homeownership rates. - So then there
00:02:55
are obviously significant
components that are playing
00:02:59
out in the potential of buying a
property that are having an
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impact on the rental side as
well.
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- Yeah, that's right. So it
mostly comes down to supply and
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demand. And what you have is a
shift, really, since the
00:03:10
financial crisis, after this
enormous wave of foreclosures.
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We had millions of foreclosures
in the US, and we had a swing in
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terms of the availability of
mortgage credit. And so mortgage
00:03:21
credit has become more difficult
to access. Most homeowners need
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a very high credit score in
order to obtain a mortgage. And
00:03:29
what that means is that there's
a pool of people who
00:03:31
historically may have been
homeowners who are now pushed
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into the rental market. And that
has driven up demand for rental
00:03:38
units and has driven up the
rents that renters are expected to pay.
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- And I guess there's also the component
of the baby boomer generation
00:03:45
when you think about the
potential of renting. People who
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owned a home for 30, 40 years,
that don't want to be in that
00:03:52
property anymore. And one of
their probably best options is,
00:03:55
okay, I'm gonna rent, I'm gonna
move into a city because that's
00:03:58
where I want to be, around all
the excitement, and renting
00:04:01
becomes the best option for them
right now.
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- Yeah, there is interesting sort
of demographic trends. And I
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think the tensions in the
housing and rental markets are
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where those demographic groups
overlap. So where there's kind
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of competing demand from
multiple generations, who might
00:04:19
also want the same type of
location, the same type of
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amenities. And so we're
certainly seeing that trend as
00:04:25
well, of people moving out of
their homes and into the cities
00:04:28
as they reach those ages where
they'd like to access some of
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those city amenities. At the
same time, there's still a lot
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of people who are looking to age
in place, who like the
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sense of community that they've
built up maybe out in the
00:04:39
suburbs, and are a bit reluctant
to give that up. And so
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that sort of comes back to not
just the choice between owning
00:04:46
and renting, but then where do
you want to own, and where would
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you rather rent.
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- So I guess it's probably not a
surprise that much that we've
00:04:53
seen this. This just
unbelievable wave, it seems like,
00:04:56
of multi-family properties that
have been built over the last,
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what, decade or two decades.
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- A big response in terms of multi-family
construction, especially in the
00:05:04
last just couple of years. And
so this is coming out of this
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recognition of growing demand
for renters who can't access the
00:05:13
mortgage market. And then some
of its the demographics, the
00:05:15
size of the millennial
generation and the potential to
00:05:18
create housing where the jobs
are. And I think this is one of
00:05:21
the key tensions in the housing
market and the market for
00:05:25
rental units as well, is are
these units being built where
00:05:28
the jobs are, and where do
people want to locate. And some
00:05:31
of that has been a reaction to
some of the constraints that
00:05:35
have been put in place, making
it difficult to build in some of
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those areas.
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- If they're not building them
where the jobs are, they're at
00:05:40
least building them where
there's access to get to those
00:05:43
jobs. And in the suburbs, where
I live in Philadelphia,
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apartment complex went up right
next to the train station in my
00:05:51
suburb where I live. So it's
easy access for people to be
00:05:54
able to get in and
out of the city.
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- Yeah, so transit oriented development
has been a very popular buzzword
00:05:59
for quite some time. But I do
think you see a shifting
00:06:02
reallocation not just within
cities, and sort of where
00:06:05
development happens within those,
but also across the country. And
00:06:07
so we've seen much more
construction happening in the
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Sunbelt, and in places where
it's easier to build. There's
00:06:14
more space, potentially cheaper
labor, less union barriers. The
00:06:18
building tends to happen where
it's easy to build. And
00:06:21
sometimes you have the jobs
actually moving there rather
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than vice versa. And so when we
think about the appeal of
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Austin, Texas, relative to the
Bay Area, and why are tech
00:06:30
companies relocating elsewhere,
some of that is related to
00:06:33
housing costs. - So
00:06:34
I guess we shouldn't expect to
see a slowdown on the
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multi-family side any time
in relative near future.
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- Well, it's interesting that you
say that. I think we are seeing a
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bit of a slowdown in multi-family
over this last year. Some of
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that is that the high interest
rates are really driving home
00:06:49
just how difficult it is to
build. And so a lot of what we
00:06:52
see is a lot of work in the
multi-family pipeline. So we see
00:06:55
a lot of new construction that
started a year ago or two years
00:06:59
ago when interest rates were low
and builders locked in those low
00:07:02
rates. But now coming through
this kind of bulge in the
00:07:05
multi-family pipeline, we are
seeing a bit of a slowdown as
00:07:09
the building shifts maybe a bit
back towards single family. And
00:07:13
we also see just the impact of
high rates on development.
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- Not that it's probably exactly
the same, but it feels a little
00:07:20
bit to a degree at times like
what we've heard about over in
00:07:24
China and Japan in terms of the
numbers of properties that are
00:07:28
built in some of these big
cities, because that's seemingly
00:07:31
the best option for a lot of
people. - Yeah,
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I mean, there's a few different
nuances to that, but making that
00:07:35
comparison. So one of the things
that's distinguished Tokyo, for
00:07:39
instance, over the last few
decades has been the relative
00:07:42
affordability of rental housing
in that country. And that's been
00:07:45
really a function of how willing
they've been to build. To
00:07:48
redevelop even neighborhoods
that have a ton of historical
00:07:51
significance. Rather than
preserving them in amber with
00:07:54
preservation laws, they've
recognized the need to build
00:07:57
evermore upwards. And that's
actually kept housing costs
00:08:00
down. We certainly don't have
that ethos in this country, of
00:08:03
building to that level of
density. And seeking to maintain
00:08:06
housing affordability has not
been a priority of policymakers
00:08:09
in previous decades. I think
this growing pressure from
00:08:13
younger generations is going to
get there eventually. But it
00:08:16
might take some time. I think
the parallels with China are
00:08:19
a bit more of a stretch, because
that has been more of a credit
00:08:22
bubble than anything else, and
sort of very generous government
00:08:26
support for construction,
combined with encouraging people
00:08:29
to invest heavily in real
estate. So encouraging people to
00:08:33
buy multiple properties as part
of their portfolio in a country
00:08:37
that saves a heck of a lot
more of their money than we do
00:08:40
in the US. And so we're a nation
of spenders. They're a nation of
00:08:43
savers, and a lot of that savings
has been funneled into real
00:08:47
estate development. It really
comes down to a policy choice
00:08:49
about whether we want to
encourage more development and
00:08:53
bring affordability back into
some sort of reasonable range, or
00:08:56
whether we're going to continue
to rely on some of these market
00:08:58
forces that are pushing the jobs
and pushing the development into
00:09:01
parts of the country that, you
know, have historically not had
00:09:05
the same level of density.
00:09:06
- So what's that policy
discussion like right now here
00:09:08
in the US? And I assume that
probably a lot of it is
00:09:12
happening either at the state or
local level right now.
00:09:15
- That's right. It's a complicated
network of policy choices. So
00:09:18
much of the decision about what
gets built occurs at the very
00:09:21
local level in terms of the
local zoning. What's the local
00:09:24
review process? Does something
have to go through a local city
00:09:27
council person or some other
type of regulatory review? So a
00:09:31
lot of these decisions are being
made at a very local level. And
00:09:35
then you have state level
regulation that, in many cases, is
00:09:38
trying to overturn some of that
local resistance to more
00:09:42
development. So this is the
NIMBY movement, or the Not In My
00:09:45
BackYard movement. And we've
seen states like California
00:09:49
trying to push back very hard
against that type of of hyper
00:09:53
local control to block new
development. And then at the
00:09:55
federal level, I think there's a
variety of tools that the Biden
00:09:59
White House has been putting
forward as kind of a mix of
00:10:03
carrots and sticks to try to
encourage development along the
00:10:05
lines that you were describing
with transit. And so you can tie
00:10:08
the funding of new support
for transit lines and for
00:10:12
redeveloping public
transportation and linking that
00:10:15
to housing development or
relaxing zoning rules. And
00:10:19
that's just one potential
direction. But I think it is
00:10:21
really a combined local state
and federal effort that's going
00:10:24
to be required for us to get
from point A to point B.
00:10:27
- So do you think that this
run that we're in around
00:10:30
housing, buy versus rent, is it
a cyclical run that we're kind
00:10:34
of in right now, or is this more
towards kind of a permanent
00:10:38
shift that we're looking at?
00:10:40
- If we lay out a few of the
elements that are kind of
00:10:43
determining where we are at the
moment, one of those things
00:10:46
is COVID. And I think we have to
recognize that the interest rate
00:10:51
environment during COVID was
especially unusual. It was
00:10:55
really a reflection of the
incredible effort of both fiscal
00:10:58
and monetary policy working hand
in hand to avoid the worst
00:11:02
possible outcomes. One of the
implications of that was driving
00:11:06
mortgage interest rates to
record lows. And so we have a
00:11:10
large share of the mortgages in
this country outstanding that
00:11:13
have interest rates below 4%.
For households, that's an
00:11:17
incredibly valuable asset, that
they have a below market price
00:11:20
mortgage. So mortgages are above
6% right now. To have a
00:11:24
mortgage locked in below 4%
means that every month,
00:11:27
you're effectively saving a
substantial amount of money, and
00:11:31
there's going to be a lot of
resistance to giving that up.
00:11:33
And so what you have is a
phenomenon known as mortgage
00:11:36
lock-in, where you have a lot of
households who are quite content
00:11:41
to sit in the homes where
they're in. That freezes up the
00:11:44
property ladder. It means that
there's not a lot of inventory
00:11:46
out there. It means that there
are very few homes on the
00:11:49
market. And that keeps prices
very high, when there is a very
00:11:52
limited supply of homes for
sale. And so the drivers around
00:11:56
that mortgage lock-in are
something that are going to
00:11:58
persist for years. This is not a
short term problem. This is
00:12:02
something where, when people
locked in a 30 year rate in
00:12:06
2021, or 2020, that can last
for a very, very long time. And
00:12:11
so this is not something that's
going to work its way through
00:12:14
the system in the short run. And
that means that we're going to
00:12:17
need to look for other
alternatives in terms of driving
00:12:20
down some of the affordability,
and encouraging some of those
00:12:22
people who are locked in, or
incentivizing some of those
00:12:25
people who are locked in to look
elsewhere and to continue to
00:12:29
move up the property ladder,
which sort of lubricating that
00:12:32
property ladder is the thing
that allows first time
00:12:36
homebuyers to get into those
starter homes.
00:12:38
- Ben, great to talk to you as
always. Thanks very much.
00:12:40
- Thanks so much for having me.
00:12:41
- You got it. Ben Keys. Real Estate
Professor here at the Wharton School.
00:12:46
- Thank you for listening
to The Ripple Effect. We hope
00:12:48
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00:12:51
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