Ripple Effect,” the Wharton School’s faculty research podcast, explores what inspires experts’ studies and how their findings resonate with the world today. The past month’s episodes highlight research into the housing market and trends in real estate, exploring how inflation, hybrid work, and generational differences impact the housing and real estate market.
In “The U.S. Housing Market Has Homeowners Stuck,” Wharton’s Lu Liu discusses what policy changes may be needed to break mortgage lock-in, which is restricting real estate inventory in the U.S. housing market, and how much inflation affects housing.
“The challenge for monetary policymakers is the idea of raising rates, which is why mortgage rates are so high today. The goal was to dampen inflation. But these are in the labor market as well as in the housing market. These are actually two factors caused by lock-in that may, if anything, be inflationary,” Liu explains. “We’re not putting our houses up for sale. We’re also not buying. But it seems the lack of liquidity and inventory seems to generate upward price pressures, so house prices have remained really remarkably high, given that rates are so high. … You may have to entice someone to pay a bit more.”
Joe Gyourko argues that commercial real estate will never be the same after the pandemic permanently changed work habits. In “Next Crisis: Empty Office Buildings,” he explains how empty office buildings will impact cities long-term. According to Gyourko, he sees between a 20% and 40% drop in demand for offices. As for converting the abandoned office buildings into apartments, “The conversion costs are just too high given our level of rents, so conversions are not going to solve this problem. They will happen, but they won’t solve the problem,” he says.
Gyourko outlines the long-term effect of this shift in commercial real estate on urban areas. “The problem for the cities is not just that the office won’t pay property taxes anymore. Around office nodes, business ecosystems built up—bars, restaurants, sometimes hotels, small shops. They will not be profitable. … I think it’s a permanent decline in demand that, over a very long period of time, the economy will grow and will grow out of it. But that’s a decade or two.”
In “Is It Better to Rent or Buy?,” Benjamin Keys explains the opposing market forces that are driving the difficult decision between buying and renting property. “It mostly comes down to supply and demand, and what you have is a shift since the financial crisis. After this enormous wave of foreclosures, we had millions of foreclosures in the U.S., and we had a swing in terms of the availability of mortgage credit,” he says. “Mortgage credit has become more difficult to access. Most homeowners need a very high credit score in order to obtain a mortgage. What that means is that there is a pool of people who historically may have been homeowners who are now pushed into the rental market, and that has driven up demand for rental units and has driven up the rents.”
And in “Inflation and the Housing Market,” real estate professor Susan Wachter discusses rising housing prices and affordability issues, and what can help bring the housing market back into alignment in the next few years. In terms of inflation, “housing right now is a major contributor, but it isn’t the only contributor. So, we can’t depend on housing and rent prices taking us out of this inflation surge,” Wachter says.
Wachter describes the cyclical nature of the housing market: “We also have another headwind, which is that the rental supply, which increased, is now decreasing. There’s a glut in the market, which is why we’re seeing rents decrease in some markets. That should get inflation under control for a time, because that glut will be absorbed. Once that’s absorbed, then we will see housing prices rise again, rents rise again.”
Younger people, Wachter says, are searching for both affordability and a flourishing job market. But, she says, “it all depends on the overall economy. We see in the most recent numbers that the overall economy is slowing. Also, it depends on affordability. We now are at affordability constraints for many households. They can’t afford the housing, so they can’t demand the housing.”
For a full list of podcast episodes, visit the “Ripple Effect” website.
