Real Estate and Housing Market Outlook | Benjamin Keys

‘Stability’ Is the Key Word in 2026

Dan Loney: We have seen the real estate market have quite the up-and-down ride the last few years. Home prices soared during the pandemic and haven't lost a whole lot since. Meanwhile, the commercial market has had to deal with the work-from-home dynamic, changing how some companies think about their real estate footprint. So, what lies in the sector ahead? Pleasure to be joined by Ben Keys, professor of real estate here at the Wharton School. Ben, when you think about this industry right now, the word that comes up on so many different interviews, in so many different places is “stability.” Stability being that key word, it seems like, for 2026.

Benjamin Keys: Well, I think that's right. It's stable in the sense that we're not expecting big swings in house prices, especially in the residential side of the market. This is a market that is struggling on a number of different fronts. I'm not sure if it's stability, or stasis, or if it's stuck. But all of those things ultimately lead to a similar pattern where we're going to expect national house prices to be relatively flat over the coming year, and those national house prices being flat are going to hide a lot of interesting variation across the country.

Loney: Let me start with residential. Mortgage rates have come down a little bit. They're still higher than what we saw during the time of the pandemic. You still have what's perceived to be a fairly important shortage of properties. These seem to be two of the biggest issues right now.

Keys: We're in an affordability crisis when it comes to the residential housing market. Many households are paying an extraordinary fraction of their income towards housing expenses, whether that's rents or mortgage payments. In a piece I wrote for the Aspen Economic Strategy Group with Vincent Reina that came out in November, we outlined a list of potential solutions for dealing with affordability. But ultimately, it comes down to an imbalance in supply and demand. We simply don't have enough affordable housing units in the cities where people want to live.

Loney: What are some of those ideas that you think are going to be important moving forward?

Keys: There are a lot of different proposals on the table. Some of those we're seeing from the administration just this week, sort of “policy by tweet.” But if you think a little bit more substantively about the challenges, it is really about supply. There are folks in the housing market that refuse to believe in the dynamics of supply and demand and the ways in which they play out. But ultimately, affordability in the housing market is a function of supply.

We need to make it easier to build. We need to ensure that construction financing is available through the interest rate cycle and broader business cycle. We need to do more to expand the housing safety net. And I think we need to make homeownership a priority when it comes to the challenges that first-time buyers face in competing with investors.

Loney: If you go back 60, 70 years, a lot of that affordability was assisted by the starter home. It seems like we've done away with the starter home, for the most part. Now, it seems like everything is $400,000, $500,000, and above. That's hard for a lot of people to consider to be a starter home.

Keys: Absolutely. That first rung on the housing ladder that gets your foot in the door to home ownership, it gives you an opportunity to build some equity, and it also gives you a chance to access a neighborhood that you might not otherwise have been able to access when it comes to school quality, when it comes to safety, when it comes to some other amenities. Those are harder and harder to find. We are seeing a small decline in the size of new homes being built, so new homes are shrinking just a little bit on average.

But that said, I think your point is a good one, which is that the most affordable tier of housing is not what's being built. A lot of that is a function of the high fixed costs of construction. It's difficult for builders to get approved, so to get permits. And zoning challenges, something we've discussed for a long time, is a big barrier. When you raise those fixed costs, it means there's a higher hurdle to construction.

We've also seen construction costs rise sharply over the last 10 years. Housing construction costs are up about 60% over the last 10 years, and that's a function of both materials, labor, land, and everything in between. You add financing costs with high interest rates, and all of those things point to developers choosing to build at the high end rather than the low end.

The Government’s Impact on Real Estate

Loney: You mentioned the “policy by tweet.” There are obviously a couple of things in the most recent period that we heard from the administration, one being people that are connected to the president buying mortgage-backed securities to maybe help lower rates. But the other thing that President Trump brought up was corporate ownership in single-family homes, and trying to maybe ease that out a little bit. I don't know if you wanted to speak about either one of those. But the government is going to play a role in trying to alleviate some of these issues, isn't it?

Keys: I think that's right. What's clear is that the problem has been diagnosed by the administration, that we have an affordability problem. Maybe the administration read my op-ed in The Hill this past week, with my colleague Vincent Reina, on improving housing affordability. But they are throwing some ideas at the wall and seeing what sticks.

The worry is that a number of these ideas are going to stimulate demand rather than supply. What that means in the housing market is that's going to bid up prices. If we think about things like the 50-year mortgage, or buying mortgage-backed securities to try to drive down the mortgage interest rate, that is going to make housing purchasing more accessible for those people on the margin who are feeling crowded out because of high interest rates. But at the same time, there's going to be more of them bidding for a scarce number of houses. So, there's going to be a portion of that that's going to be captured by the existing owners in the form of higher prices.

It's hard to know exactly how that all plays out. But if we're looking at the spectrum of potential policy responses, I think doing things that are largely on the demand side are probably going to have unintended consequences. I'm much more excited with policies that are going to stimulate supply. Some of those are, when it comes down to it, about building new housing. New construction, new units.

The administration's proposal to squeeze institutional investors out of the market is another potentially very controversial and potentially illegal proposal when it comes to thinking about solutions to get people into homeownership. If you think about the large institutional investors in the U.S., those that own 1,000 homes or more, they represent only 1% of the U.S, housing stock. On the margin at that scale, it's just not going to move the needle for the affordability issues in the country.

But as we go further down and we think about the overall investor share in the market, it is on the order of 10% of all single-family homes in the country. I think there are things that can be done through the tax code, through credit markets, that could reduce the benefits of ownership for investors and steer more towards owner-occupied residences. But I think fiat by tweet is certainly not going to get it done. We need to do something that's far more thoughtful and resilient to potential challenges in the court.

Loney: What about the rate lock component? That's something that we've talked about for several years now. In the early days of the pandemic, so many people refinanced at 2.75%, 3%, 3.25% on their existing home. That allowed them to do home projects, and there's just not a want or a need for many people to move because of that. That's the component that from a historical perspective that I don't think we had prior to the pandemic.

Keys: It is. And it's something we've been talking about for years now and will continue to talk about for years, because over 50% of all outstanding mortgages in the U.S. have interest rates below 4%. When we're talking about doing things to the mortgage-backed securities market that might move interest rates by 25 basis points, from a little bit above 6% to a little bit below 6%, the majority of mortgages are below 4%. And most of those people are going to sit on those mortgages. That is a one of the strongest performing assets in their portfolio, is a below-market mortgage. That induces people to stay in their homes longer than they otherwise would.

I don't think we've seen this dynamic play out in modern mortgage history in the U.S., with this degree of lock-in. I think what that ultimately leads to is many fewer homes on the market. It leads to many fewer transactions. And it leads to these frictions when it comes to people finding where they want to live.

I think one more under-appreciated piece of this is that COVID really acted as a type of musical chairs in the housing market. There was a big opportunity where the music was playing. Interest rates were low, and people reoptimized. A lot of that reoptimization was accelerated retirement or accelerated suburbanization. People with young families moving to the suburbs. Well, the music stopped, interest rates shot back up, and now those people are happy where they are. I think that pulled a lot of transactions forward in time. All of that leads to a more depressed housing market when it comes to transaction volume and when it comes to the availability of properties.

Loney: I mentioned the commercial real estate sector. Let's spend some time on that right now. This industry that been impacted by the pandemic as well, because of employees working from home more often. Companies are reassessing just how much real estate they want to have in the mix, and that's leaving a lot of main street shops not being used.

Keys: Just like with the residential side of the market, this has been a gradual process. I think in some ways, the financial crisis in 2008 sort of warped our brains into thinking that housing and real estate markets respond very rapidly to changing conditions. In fact, they usually respond very slowly. Most office leases are 10 years or longer, so firms are very gradually reassessing how much space they want to use.

But we are seeing a big uptick in in office-to-residential conversions. This year, we're going to see the Flatiron Building in New York City probably finish their conversion process into residential units. That's the leading example of a very famous building where this conversion is happening. I think we are seeing it play out in cities across the country, where downtowns emptied out of many of their office workers, and now there's a desperate effort to bring foot traffic back to the city. Some buildings are much more easy to repurpose than others.

I think it also, as you alluded to, has these knock-on effects for retail, depending on the foot traffic in some of these downtowns. Some of the corridors have bounced back very quickly, and others continue to struggle. That's really a function of the industries and the dynamics city by city.

Loney: One of the other hopes was the fact that the current administration talked a lot about the repatriation of companies into the U.S., taking over facilities, taking over factories, and building out property from there. That will probably happen to a degree. But would it happen enough where you're going to have a significant impact on the commercial real estate market?

Keys: I wouldn't think so, given the the dynamics of work from home across industries, right? The industries that I think they have in mind are much more about manufacturing and controlling supply chains. It's not office jobs that are in the discussion when it comes to repatriation. So, I think those are slightly on two different tracks.

We have seen firms settling into a work from home that's some sort of in-between model, where you're in the office two, three maybe four days a week. If you're using your same offices three or four days a week, you probably don't need to downsize all that much on your office space. But there may be some ways in which you can use that space more flexibly or more creatively, and we're seeing firms making agreements that allow them to do that.

The State of Rent and Insurance

Loney: Two final things I wanted to bring up. First one, rents. I know you have followed rents closely. It's been an important topic for you. We've seen rents come down. That's obviously going a good thing, whether it is residential or commercial. Where are we in terms of rents right now?

Keys: Yeah, I think it’s a good thing for the renters to see the rents coming down. I think we're seeing continued increase supply of rental units in many markets, and that's delivering on lower rents. We're seeing increases in concessions from landlords. That means offering free rent or other perks to try to get people in the door. We're seeing big gaps between the existing rents that are being paid and the rents for new renters in a lot of markets. There's a big wedge between those. This is an opportunity where, if you're a renter right now, it pays to shop around and see what's out there. Because if you've been in the same place for three or four years, chances are that the new renters in your building might be paying quite a bit less than you are. In cities where we've seen an uptick in construction, especially since COVID, we are seeing rents soften. In other places, like in Manhattan, rents remain astronomical. It is a tale of different markets for sure.

Loney: What about the insurance industry and some of the concerns they have about climate change. Insurance costs have obviously been a big problem for many people.

Keys: Insurance has been a big focus of my research over the last couple of years. We're seeing large increases in homeowners insurance over the last few years. If anything, in the commercial side, insurance has increased dramatically faster. It's just a much less regulated market. What we're seeing in this latest wave of research is that this is having an effect on house prices. The areas that have seen the sharpest increases in insurance — which tend to be those most prone to disaster risk, whether that's wildfires, hurricanes or severe storms and hail — those are areas where we are seeing house prices respond. Now, these areas have, in general, already seen house prices rise quite dramatically over the COVID housing boom. But we estimate that they would have risen maybe $20,000 more had it not been for rising insurance costs. So, these insurance costs are really a pocketbook issue for households at the moment, and it is affecting asset values in a very direct way.

Loney: Let me, finally, touch on this. Are you seeing a significant impact from AI in the real estate market?

Keys: I think we're still in the early innings when it comes to AI in real estate. Some of that is a question of organizing often messy and complicated data sets. If you think about a multifamily owner who has information on rents and vacancies, also information on expenses, also interacts with their tenants. I think we're seeing AI entering in where you'd expect the lowest hanging fruit. Things like chatbots to manage maintenance requests. I think that's kind of the early stages of this.

But when it comes to really building out the functionality of AI for real estate investing, whether that comes to making portfolio decisions, purchase decisions, renovation decisions, or exit decisions, I don't think we're there quite yet. I think there are some firms that are leading the charge, but it's still very early stages when it comes to the interplay between AI and real estate.

I'm teaching a course this spring on real estate data analytics, which I think of as the precursor to really embedding AI into the systems when it comes to real estate investing.

Loney: Going to drag you kicking and screaming down that path, isn't it, Ben?

Keys: Far from it. We love data over here.