Past Issues • 2009 • 2008 • 2007 • 2006 • 2005 • 2004 • 2003 • 2002 • 2001 • 2000

Wharton News

Albert Saiz

Slower Recovery for Commercial Real Estate

Fernando Ferreira

Ferreira Explores the California Tax Problem

Real estate professor Fernando Ferreira shared his views in the Knowledge@Wharton article, "Not with the Plan: State Budget Woes Create a Black Hole for U.S. Stimulus Funds IOUs in California" (8/5/09). Ferreira states that the problems facing California stem from a change it made to its constitution in 1978. "Known as Proposition 13, the ballot initiative capped California property taxes at 1% of a home's purchase price-a move that immediately slashed the amount of property taxes the state and local governments could collect. The initiative also imposed new restrictions on raising taxes, requiring any tax increase to win a two-thirds majority in both legislative houses. It imposed the same two-thirds restriction on local governments. 'What the state did over time to compensate is increase income taxes,' Ferreira says. When economic activity soared during the housing boom, California profited from this tax structure. The state raked in money, and voters passed dozens of propositions to spend the extra cash on everything from stem cell research to child welfare. 'But as soon as the economy tanked and the bubble burst, the revenues from income taxes fell more than 30% . . . It's much easier to vote on increasing expenditures, but they never say how they're going to pay for it. And any time they propose to increase taxes, it always fails. That can lead to complete disaster in the long run.'"

Grace Wong Bucchianeri

Bucchianeri Asks, "Is Homeownership for Everyone?"

Knowledge@Wharton (6/10/09) featured the research of assistant real estate professor Grace Wong Bucchianeri. The article "So You Think Owning a Home Will Make You Happy? Don't Be Too Sure" focused on the benefits of homeownership. For generations, owning a home has been viewed as the cornerstone of the American Dream, the foundation for a happy family life and long-term financial security. In her paper, "The American Dream or The American Delusion? The Private and External Benefits of Homeownership," Bucchianeri challenges that conventional wisdom: "While homeowners do experience significant joy, they also face more aggravation, spend less time with friends and are even heavier than renters living in comparable homes. Past research into the mood of homeowners showed that people felt a sense of pride and comfort in having their name on a deed. Bucchianeri argues that her research shows, however, that once the data are controlled for a range of variables, owning a home appears to deliver no more happiness than signing a monthly rent check. . . . Bucchianeri examines survey data from some 600 women in Ohio and weighs it across tax records and census data to study how homeownership affects the moods and feelings of individuals as well as their social interactions. 'Homeowners report more positive results, but if you control for basic characteristics such as income, how nice the home is and health status, those results go away,' explains Bucchianeri. 'This suggests that our perception that homeowners are better off than renters might be fueled only by casual observations. The conventional wisdom might not hold up so well when you look at the data carefully.'"

Joe Gyourko

Gyourko Takes Issue with "Livable Cities" List

The article "Why the 'Livable Cities' Rankings Are Wrong" in Forbes (8/9/09) noted that the top cities make "ideal locales for groups like traveling corporate executives, academics and researchers targeted by such surveys. With their often lovely facades, ample parks and good infrastructure, they constitute, for the most part, a list of what Wharton's chair of real estate Joe Gyourko calls 'productive resorts,'" a sort of business-oriented version of an Aspen or Vail in Colorado, or Palm Beach, Fla. Honolulu is an exception, more a vacation destination than a bustling business hub. Yet are those the best standards for judging a city? … What makes for great cities in history are not measurements of safety, sanitation or homogeneity but economic growth, cultural diversity and social dynamism. A great city, as Rene Descartes wrote of 17th century Amsterdam, should be 'an inventory of the possible,' a place of imagination that attracts ambitious migrants, families and entrepreneurs."

Renting is Best for Some

An article in The Wall Street Journal, "The New American Dream: Renting," (8/14) cites the opinion of Professor Joe Gyourko. "It's time to accept that home ownership is not a realistic goal for many people and to curtail the enormous government programs fueling this ambition. Many economists, like the Wharton School's Joseph Gyourko, are beginning to make the case that public policies should encourage renting, or at least put it on a level playing field with home ownership. A June 2009 survey commissioned by the National Foundation for Credit Counseling, found a deep-seated pessimism about home ownership, suggesting that even if renting doesn't yet have cachet, it's the only choice left for those who have been burned by the housing market. One third of respondents don't believe that they will ever be able to own a home. And 42% of those who once purchased a home, but don't own one now, believe that they'll never own one again."

Peter Linneman

Obama Administration Should Tread Cautiously

Wharton real estate professor Peter Linneman is cited in a Knowledge@Wharton article, "The Storm Is Over, the Wreckage Remains" (8/14). According to the article, Professor Linneman observed that although some upbeat economic news in recent weeks might indicate the beginning of the end of the recession, there's still plenty of "wreckage" to deal with. "Nowhere is this more apparent than in the housing and commercial property sectors, which have taken one of their worst beatings ever." Linneman drew on "policy missteps of the past to caution the Obama administration to tread carefully and avoid 'trying to cure things they can't cure,' while contending that the U.S. might have more in common with countries like Venezuela, Russia and Japan than most observers think."

The Future of Commercial Real Estate

Several Wharton real estate professors were cited in an article "Commercial Real Estate Faces Financial Tremors" that appeared in the Khaleej Times Online (8/11/09). The article addressed concerns that commercial real estate is about to become the next high-profile casualty in the ongoing economic meltdown. "'The shoe has already dropped,' said Professor Susan Wachter. 'Values are down severely. Vacancy rates are at 20-year highs. . . . This is entirely a financial crisis, first and foremost. The problem is the seizing up of financial markets, not overbuilding as in the past.'"

Joseph Gyourko noted that residential real estate has already surfaced as a major factor in the recession. Many homeowners bought properties at inflated prices fueled by easy credit and now hold mortgages that are worth more than the value of the underlying property. "I think there was mispricing in commercial real estate, too, but it is not as bad as in housing because that would be impossible," Gyourko says. "There was a lot of optimism about commercial real estate values and a lot of cheap debt [was taken on]. I think there will be stress that will make this worse than what happens [during a] normal downturn."

Peter Linneman agreed that private equity real estate funds face the greatest peril. Because the firms have committed so much capital, they have little in reserve to weather uncertainty, he notes. "I think it's fair to say that economic and capital market uncertainty leaves a lot of those funds hamstrung," said Linneman. He cautions that "a combination of record increases in the level of consumer savings as well as government fiscal and monetary policy designed to halt the economic collapse will inevitably lead to higher inflation." Linneman says that while Fed Chairman Ben Bernanke has promised to pull back on the money supply the minute inflation ticks up, it will be politically difficult to pull back—by raising interest rates—while the country is still wrestling with lagging unemployment and weak credit markets." The government's involvement in the economy will slow the rate of economic growth to rates not seen since the 1970s, he predicts. He criticizes the Obama administration for not taking strong action to force banks to recognize losses, which he believes would have paved the way for renewed lending and growth. According to Linneman, it's ironic that Larry Summers, who served as Treasury Secretary in the Clinton Administration and is now director of the National Economic Council, was constantly urging Japan's banks to write-off bad assets during that nation's prolonged economic slump. Now, he says, Summers is reluctant to take the same action against major US lenders.

The future of commercial real estate, he stresses, is linked strongly to the overall economy. "Everything about real estate today is basically about the economy," he says. "As the economy rebounds, confidence in general will grow. As that occurs we will see more confidence in capital markets and hopefully more stability in the political environment."

Job Losses a "Negative Fundamental"

In a interview for Bloomberg.com (8/10), Professor Gyourko commented, "'Demand for commercial space comes from employment and the income generated by that employment." "Mounting job losses are a 'really significant negative fundamental,' he said. 'Conditions are going to be tough for the industry for a while.'"

Predicting Housing Prices

In his July 14 Economix column in The New York Times, Ed Glaeser wrote about "How to (Sort of) Predict Housing Prices," referring to his work with Joe Gyourko. "There are two reasonable approaches to predicting the future of housing prices. Approach No. 1 is the housing equivalent of 'technical analysis' for stocks, and it assumes that the key statistical regularities of housing price changes—long-term reversion to the mean and short-term momentum—will persist in the future. Joseph Gyourko and I find that if an area's prices go up by an extra dollar over one five-year period, then that area's prices on average drop by 32 cents over the next five years. This pattern is long-term mean reversion: As Joseph told Pharaoh, big booms are followed by big busts. But at higher frequencies, like one year (or one month), momentum is the rule. If prices went up by an extra dollar during one year, those prices rise by 71 cents, on average, during the next year. One possible explanation for this fact is that people may base their expectations about future price growth on the price growth during the recent past."

Gyourko Serves on Singapore Panel

Singapore's Business Times (5/28) covered the first public seminar organized by the National University of Singapore's Institute of Real Estate Studies. "Appearing on the panel, "Distressed Properties May Flood Markets," Professor Joe Gyourko commented that a "flood' of distressed properties may come if credit markets remain tight as large volumes of loans mature. Gyourko shared some worrying numbers on this at the seminar. He cited estimates from Goldman Sachs, which found that US$1.2 trillion of commercial property debt will come due in the US from 2009 to 2011. With the near shutdown of the commercial mortgage-backed securities market, some property owners will not be able to obtain refinancing, he said. In fact, distressed property assets in the US have just started to appear and will increase in number over the next few years, Prof. Gyourko told reporters on the sidelines of the seminar. These assets can come from any property segment depending on owners' ability to roll over debt. There will be a 'historic investment opportunity not seen in the US since the early 1990s' and investors are setting up funds for this, he said."

Marja Hoek-Smith

Hoek-Smit: BBC Advisor

Marja Hoek-Smith advised the BBC producer of "BBC World Debate: Housing the Future" on current trends in housing policies and housing finance for developing and emerging market countries. The televised debate aired in early August.

Witold Rybczynski

Rybczynski: Book Readings and Signings

Witold Rybczynski was a keynote speaker at the annual meeting of the American Planning Association in Minneapolis. He gave readings from his latest book, My Two Polish Grandfathers, at the Canadian Center for Architecture in Montreal, the Polish Embassy in Ottawa, the AIA Center and the Harold T. Washington Library in Chicago, the ULI regional meeting in Philadelphia, and the Book Festival in Chestnut Hill, Pa.

Wachter Speaks on Foreclosures, Global Issues

Susan M. Wachter

Susan M. Wachter gave an invited address, "Misaligned Incentives and Mortgage Lending," to the Global Market Integration and Financial Crisis Conference" at the Hong Kong University of Science and Technology in July. She testified on "The Foreclosure Crisis and What is to be Done," for "Current Trends in Foreclosures and What More Can Be Done to Prevent Them," a Congressional Hearing for Joint Economic Committee on Financial Services, in Washington in late July, and published "System Risk and Market Institutions" with co-author Andrey Pavlov in Yale Journal on Regulation (Vol. 26, No. 2, Summer 2009). Her opinions were sought for "Commercial Real Estate Market Flailing," Marketplace; "Banks Slow to Modify Mortgages," Christian Science Monitor; "Debate: Has Housing Hit Bottom?," CNBC; "Wharton Professor: crisis an 'opportunity' for REITs," Real Estate Investment Smart Brief; and "US mortgage applications climb eases Fed pressure," Reuters. She was interviewed on NPR, CNBC, and Fox Business.

• Send this article
• Return to index of articles