Zillow’s new promotion is enticing for eligible home buyers in Arizona who can’t save enough for a down payment: Pay as little as 1% down, and the company will contribute 2% in closing costs to help them get in the door of a new home.

If the offer is reminiscent of the dangerous lending schemes that led to the housing market collapse and Great Recession of 2008, Wharton real estate professor Benjamin Keys says not to worry. The promotion is more about a company looking to boost business and spur activity in a housing market that isn’t moving, he said.

Mortgage revenue for Zillow, a fintech real estate company, is down about 17% year-over-year along with an 8% drop in traffic to its popular website and app. The slide reflects the downturn of the U.S. housing market, where home sales have fallen since a peak in 2021 as mortgage interest rates have risen rapidly.

The average interest rate on 30-year fixed-rate mortgage is 7.56%, according to Bankrate.

“As we think about the effect the rate hikes are having on the housing market, the most obvious and dramatic one is on volume,” Keys said to Wharton Business Daily on SiriusXM. (Listen to the podcast.) “Zillow is fundamentally a volume-based business, so they’re looking for innovative solutions to increase some of that volume. I think of this down payment program as one potential direction for them to innovate.”

Zillow’s program is similar to one introduced by Rocket Mortgage a few months ago. Keys said he won’t be surprised if other companies start offering low down payment programs because the standard of 20% is a myth. The Federal Housing Administration, Freddie Mac, and Fannie Mae have mortgage loans for down payments ranging from 3.5% to 5%, and the median down payment nationwide is about 7%.

“I think we’re going to see a lot of scrambling on the part of mortgage lenders, brokers, and realtors to try to find some ways to juice volume from this incredible low point, and this is the challenge,” Keys said. “The housing market is in a deep freeze.”

“The housing market is in a deep freeze.”— Benjamin Keys

Rising interest rates have prompted current homeowners to stay put, which has sharply reduced inventory that was already historically low in many parts of the country. Keys cited data from the New York metro area, where there were 70,000 listings in 2016, compared with the current 32,000. Baltimore had 13,000 listings in 2016, compared with a paltry 3,500 now. But the story isn’t as simple as people not being able to buy or wanting to sell. Overall, the housing market is a complicated tale of supply, demand, demographics, government regulation, and financing.

“When we’re thinking about this question of innovation, we’re thinking about chiseling away at a giant iceberg that is the housing market, and right now these [tools] feel like a very small chisel to me,” the professor said. “It will be interesting to see whether there is more ambition coming forward.”

In the Housing Market, Change Is Glacial

Innovation in the housing market has been slow. The design of mortgage contracts is one aspect that has gotten a lot of attention since the recession and undergone the most change. Keys pointed out that there were not a lot of foreclosures during the COVID-19 pandemic as a result of federal and state policies implemented to help homeowners. Many mortgage holders were offered forbearance, many evictions were put on hold, and direct financial support was made available through government programs.

“All of those things prevented that big disruption to the housing market, and the consequence of doing so is that now a lot of people are staying in place,” Keys said. “The way we helped people during COVID was the big policy innovation in the housing market. And now we have a new set of problems and will need to think of new ways to innovate.”

There’s a ‘Deep Freeze’ in the Market

Keys said the affordable starter homes of the past are not being built, and rent has far outpaced inflation. The median rent in the U.S. in July was at $2,029, rising by 15% in the last two years. That means plenty of renters can’t afford to sock away money for a down payment in a housing market where prices are spiraling. The median sale price for a home in the U.S. was $416,000 during the second quarter of this year.

“The housing market has never been one size fits all, but it feels that much more idiosyncratic at the moment.”— Benjamin Keys

Keys is encouraged by what he believes is the start of a construction boom, albeit one that is uneven across regions. Inventory is extremely low on the East Coast, for example, yet price softening and availability are increasing in some cities including New Orleans, Louisiana.

“The housing market has never been one size fits all, but it feels that much more idiosyncratic at the moment,” he said, adding that subsidizing homebuilders will only encourage them to seek open tracts of land in areas with zoning regulations that are easier to hurdle, rather than densely populated districts with tougher laws and a dire need for more units.

“That’s one of the tensions that the housing market is facing right now,” Keys said. “If you have an oversimplified solution to our housing supply crisis, it’s going to be applied to the wrong markets.”

Players like Zillow are “carving out slices” in the market, he said. But that limited activity doesn’t shift the overall U.S. housing market, which is large and complex. And whether Zillow’s 1% offer is beneficial to homeowners depends on timing. If homeowners take advantage of it at a time when prices are rising, their equity will rise faster than if they wait a few more years to get into the market.

But given that Zillow has rolled out its program only in Arizona, it’s still “small potatoes on a national scale,” Keys said. “That’s a market where you wouldn’t expect to see prices on a sharp upward trajectory in the coming years because there is a lot of new supply coming online.”

Keys thinks the deep freeze will remain the biggest influence on the housing market, and it’s just getting started. Mortgage applications are down by half since 2021 because of interest rate hikes.

“There are so many homeowners that are sitting on mortgages that are 3% or below, and that’s a big financial friction if you want to move somewhere else,” he said. “I think the market is going to struggle along for some time as it gradually works its way through these large financial frictions that we haven’t seen in a long, long time.”