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