Wharton’s Susan Wachter helps define what cities need to grow.

Like the flow of traffic in and out of downtown on a workday, the prospects for America’s cities seem to wax and wane. Pessimism took hold in the 1970s and 1980s as people moved to the suburbs and urban jobs disappeared. Optimism later surfaced as young couples began to gentrify old neighborhoods, sometimes at the expense of poorer residents. On occasion, a restaurant renaissance will bloom, and the prospects of cities will seem bright; at other times, a deteriorating public school system and block after block of decaying housing can make for a bleak outlook.


Susan M. Wachter, professor of real estate and finance, has seen pundits pronounce the death and resurrection of cities more than a few times. But her view has remained consistent. She is bullish on urban America.


“It’s clear that there is the potential for new investment in cities,” she says. “There are continuing advantages to the clustering of firms in cities especially in knowledge-based sectors and other fields where in-person contact is key. Infrastructure, culture, commercial real estate, both public and private, are heavily concentrated in cities. I do not think cities in the future will decline absolutely in population, although they undoubtedly will relatively to suburbs. In fact, recent trends point to urban recovery.”


Wachter’s passion is to conduct research on real estate – on real estate economics, urban economics, and housing finance. “I don’t think cities have been dying a natural death. If so, we’d see cities dying across the world,” she says. “In fact, the global urban problem is too much growth. In the United States, there are particular processes at play weakening cities. The processes are self-generating. As the middle class leave cities, the tax base decreases, and taxes go up. Unfortunately national housing policy has also contributed to the exit of the middle class and cities’ decline. But this can be reversed.”


Wachter is perhaps best known for her pioneering research on housing affordability. In addition to her work in this area, she has numerous publications on house price dynamics, land regulation, community reinvestment, and urban growth patterns. She also has done research on mortgage markets and major secondary mortgage market institutions, Fannie and Freddie.


A member of Wharton’s finance department for many years, Wachter helped establish the real estate department with Professors Peter D. Linneman and Joseph Gyourko in 1994. The department has six primary faculty members; five other Penn faculty members hold secondary appointments and play important roles in teaching and research. U.S. News and World Report has consistently ranked the department first among real estate departments in the nation.


“Working with Joe and Peter to set up this department was important for the fields of urban and real estate economics,” says Wachter, who served as chairperson of the department from 1997 to 2000. “It’s unusual that urban issues and real estate economics are found together in an academic setting. The department and Wharton’s Samuel Zell and Robert Lurie Real Estate Center combine public and private market research. We’re an example for European and U.S. business schools, which have looked to us as a model as they establish real estate programs. This is a delightful time to be at Wharton. Not many people get a chance to be part of a department’s birth and help it grow.”


Wachter’s work extends beyond academia and has brought Wharton expertise to play in the business and policy arena. This includes creating of a Geographical Information Systems (GIS) facility that employs state-of-the-art modeling technology to analyze commercial and residential real estate development and price appreciation patterns in cities.

Working at HUD

In late 1998, Wachter’s research caught the attention of the Clinton administration, when the U.S. Department of Housing and Urban Development (HUD) had the senior policy post to fill. In early 1999, she was nominated by President Clinton to be assistant secretary for policy development and research at HUD. She was confirmed by the Senate and served until President Bush took office in January of 2001.

As a member of the White House Interagency Task Force on smart growth, she pressed for policies that supported reinvestment in cities. She also increased her department’s budget so that it could hire more economists and conduct the research necessary for the office’s mission. While at HUD, Wachter was responsible for producing more than 10 congressionally mandated reports, and she edited five volumes.

Her tenure at HUD gave Wachter a first-hand look at the intersection of real estate, public policy, and politics. “HUD is a small to midsize agency – 10,000 employees with a $40-billion budget but with relatively few assistant secretaries – which allows you to work closely with the Secretary, Congress, and the White House on policy development,” she says. The HUD post also gave Wachter a chance to be an administrator. She was directly responsible for nearly 200 employees and disbursing more than $30 million annually, as well as oversight for policy development within the department. Sixteen-hour days were not uncommon, and she was grateful that her boss, HUD Secretary Andrew Cuomo, did not ring her cell phone more than a few times a day on weekends, which she spent at home with her family in suburban Philadelphia.

Wachter also was in charge of the American Housing Survey, which is conducted periodically for HUD by the Bureau of the Census and used to track national housing conditions. The survey, which includes a sample of about 55,000 homes, collects a variety of data on the nation’s apartments, single-family homes, mobile homes, and vacant housing, and enables the tracking of the quality and quantity of the nation’s housing. The survey is exhaustive, and it contains detailed information on the characteristics of the residents, physical condition of individual houses, and neighborhoods where they are located. Using the data, Wachter and her staff produced reports for Congress on “Worst Case Housing Needs,” tracking improving housing quality but worsening housing affordability conditions in many parts of the nation.

Economists and other researchers crave such minutiae reported by the AHS, but the information is not available to just anybody. Because of privacy issues, the government requires that people wishing to access the data demonstrate the importance of their research. Researchers also “have to be background-searched and finger-printed,” says Wachter, who went through the process herself twice, first to be nominated and recently to conduct research.

During Wachter’s time in Washington, HUD revitalized existing programs to carry out its core mission of providing government-assisted housing and community development programs. For instance, Congress provided new funding to jump-start redevelopment of distressed public housing. Existing housing projects were demolished and mixed-income housing units, financed by a combination of private and public money, were reconstructed in their place.

“Privately funded, mixed-income housing can be a key factor in revitalizing entire areas of cities,” Wachter says.

Wachter also helped initiate new funding for HUD’s tenant-based voucher program, which helps low-income people move into housing. Housing vouchers work like school vouchers: assisted households receive money from the federal government and then are free to use this money to rent or own the housing of their choice. A major study funded by Wachter’s office demonstrates, based on actual experience with vouchers, the major positive impact vouchers can have on families’ health and children’s educational attainment.

Wachter calls vouchers “a more efficient way of delivering affordable housing to people.” “In contrast to public housing projects which concentrate people in pockets of poverty, vouchers give people a choice in where they live and, by deconcentrating poverty, can help reverse some of the deleterious effects public housing projects have had on inner cities,” she notes.

Wachter addressed the role of vouchers in a study entitled “Principles to Guide Housing Policy at the Beginning of the New Millennium,” co-written with Michael H. Schill, professor of law and urban development at New York University, and published in the Spring 2001 issue of Cityscape, a journal published by HUD. The article notes that market-rate housing provided in cities that have in the past lost population and particularly the middle class can both help to revitalize cities and provide housing on otherwise vacant brownfields. This urban development and housing will be driven in the future by a combination of private and public financing.

“That’s the new wave of urban development,” Wachter says. “Housing programs should work with the market rather than against it.”

Home Ownership

Wachter’s work on housing affordability has perhaps drawn the most attention from scholars and policy analysts. The issue is of interest because of the centrality of homeownership to the nation’s housing policy. Much of Wachter’s research has explored the factors that keep people from becoming homeowners. In several papers, she has analyzed how interest rates and down payment constraints can be used to measure the national rate of homeownership.

Most recently, she has been working on a paper that examines the role that financing constraints play in whether a person becomes a homeowner or remains in rental housing. This study, co-authored with researchers at the Federal Reserve Board, will be presented at a January 2003 meeting of the American Real Estate Urban Economics Association. The research is a continuation of Wachter’s ongoing work on the determinants of home ownership, on which she has testified to Congress.

“Lack of wealth limits homeownership.” says Wachter. Wachter’s original research on homeownership, conducted with Peter Linneman, was the first to demonstrate the impact of financial constraints on homeownership. The recent research confirms the earlier findings pertaining to wealth constraints and shows a growing role of credit quality in the last decade.

For many years, Wachter has also been analyzing how rates of home-ownership and mortgage-lending decisions affect neighborhoods. Her work has shown that neighborhood characteristics are critical in the mortgage-lending process, but that once those characteristics are adjusted for, there is little evidence that the racial and ethnic composition of a neighborhood is a significant factor in decisions to reject or accept mortgage applications.

Wachter has shown that increased homeownership is, other things being equal, linked to improved neighborhoods. Her findings also address a policy conundrum – anything that improves cities also makes them less affordable. “Homeownership acts as a hedge against the downside of urban revitalization,” she explains. “It’s a hedge against the increases in housing costs that can accompany revitalization. Without access to homeownership, revitalization has potential negative consequences. People can be priced out of the ownership market.”

What is more, her work has revealed a subtler point: the political consensus for urban investment and revitalization originates with homeowners. Hence, homeowners, because they benefit from revitalization through higher housing prices, have it in their interest to push for the political change necessary for revitalization.

Housing Supply Elasticity and “Smart Growth”

One of the key findings of Wachter’s research is that housing in the United States, compared with housing in many other countries, has remained affordable for most people.

“Unlike most parts of the world, the United States is quite unusual in that we have a very high supply elasticity for housing,” she explains. “We have a large amount of space in the United States – compared with other countries – and local control which translates into cities competing to supply infrastructure for new housing subdivisions. The increase in demand for housing in this country, as elsewhere, is generated by both income growth and, in part, immigrant-driven population growth. What is interesting is that in the U.S., this has not translated into higher inflation-adjusted housing prices.”

In many other parts of the world, housing supply is much less elastic. When demand increases, housing prices can rise dramatically. For example, in the London metropolitan area, housing prices have increased fourfold over the last three decades in inflation-adjusted terms. Such inflation is typical in many parts of the world.

But Wachter, in the 2000 State of Nation’s Cities Report produced by HUD and by the White House, identified a new trend in the United States, beginning in the last half of the 1990s. Housing prices have risen relative to overall prices and have done so particularly sharply in and near cities like San Francisco and Atlanta. Various explanations have been offered for this phenomenon, including the rapid expansion of the technology sector in these cities. Smart growth – which is designed to contain urban sprawl and achieve such goals as clean air and water and the improvement of cultural and recreational amenities – is admirable in many respects, but may have contributed to rising prices by limiting the land available for development.

Wachter’s recent research with Richard Herring examines the sources of real estate price trends, and particularly the sources of bubbles. While Wachter does not believe that there is a national real estate bubble, there may still be localized over-valued markets, and there is a need for local market information to determine whether and where local bubbles are forming.

The Importance of GIS

These days, Wachter is devoting some of her research efforts at Wharton to the uses of Geographic Information Systems (GIS), a new technology that has many uses for business and government policy decision making. GIS allows data to be collected, stored, and tracked spatially, for instance showing trends in homeownership not only through time but also across neighborhoods. Wachter founded and directs the Wharton GIS Lab, a cutting-edge facility specializing in this technology. Through work in the lab, she has pioneered academic uses of GIS, as well as business uses through private sector partnerships. Recently, Wachter hosted a conference at the Wharton School on the expanding role of GIS in business and government, bringing together leaders from academia, government, and the private sector to discuss implications and issues for the new technology.

While in Washington, she established an office on GIS Research. This office initiated HUD’s Research Maps, which allows HUD to do large- and small-scale geographic analyses of neighborhood development throughout the United States, using local data. CD-ROMs are being used throughout the country by state and local planning agencies. A Web-based component is in development.

“Geospatial knowledge can be the foundation for fact- based policy on community and regional development,” Wachter says. “The new access to local spatial data and the ability to analyze such data in real time is increasingly important for locationally based community and business decisions.”

New federal policies, coupled with her own observations and research on urban issues, only serve to strengthen Wachter’s conviction that the future of America’s cities is positive.

“The evidence is that cities that were declining in the ’70s and ’80s are now either showing growth or at least not losing population. Of the top 30 cities, two-thirds that were losing population in the ’70s and ’80s are now growing. This includes cities of all sizes: New York, Chicago, Wilmington, Providence, Atlanta. That makes all the difference in the ability to invest in the future and maintain some population growth. The key factor in real estate values is expectations. If the expectation is that cities will grow, that expectation will be reflected in property values and a high property tax base, giving rise to a virtuous cycle that can reverse the vicious cycles of urban abandonment of the past.”