Peter Linneman On Interest Rates, Multifamily Rents, Housing Shortages And AI

Peter Linneman, economist and former professor at the Wharton School of the University of Pennsylvania, said on this week’s Walker Webcast that his predictions for the U.S. economy are typically “pretty clear.” 

Right now, however, he sees very little clarity as to where the economy may be heading.  

Economic data usually tells a concise story, but recent signals are conflicting, he said. The Bureau of Labor Statistics' employment numbers were revised in September, showing that the federal government overestimated total jobs created from early 2024 to early 2025 by more than 910,000 jobs.  

On the flip side, unemployment claims remain low, at around 230,000 claims per week — suggesting continued strength in the labor market. 

“Private data like ADP's is still noisy and inconsistent, and government figures themselves are being adjusted frequently as response rates fall,” he said. “The result is a picture that could mean either a temporary slowdown or the start of something worse. It’s like watching the first scene of a movie — you can’t yet tell if it’s a comedy, a tragedy or a thriller.”

His advice? Proceed, but proceed with caution.

“Only do what you have to do in the next three to four weeks, and let a little more data come out,” he said.  

Walker Webcast host and Walker & Dunlop CEO Willy Walker questioned Linneman’s sentiment, saying that there hasn’t been a seminal moment or event that would call for such a pause. 

“I'm never an advocate of doing nothing for a long time. It's much better to do something and adjust as you go,” Linneman said. “But if you don't have to do something in the next month, don't. If you must, do it. I'm not saying stop life.” 

Three months after Linneman predicted the Federal Reserve would make three interest rate cuts by the end of the year, only one cut of 50 basis points in mid-September has been made. Whether the Fed will make two additional rate cuts is yet to be seen. 

Linneman is sticking to his guns, however, predicting 75 basis points will be cut by the end of the year.

“[The Fed] is basically giving President Trump the finger, saying, ‘You're not going to tell us what to do,’” he said. “I think they would have cut [interest rates] in the summer by 25 basis points had it not been for Trump because they do not want to look like they're influenced by him. They do not want to look like they're bowing to that pressure.

“I think [Trump] has delayed the interest rate cuts by all this bluster. He's actually hurting his case right now because they're behaving to protect their territory.”

Even amid the general economic uncertainty and elevated interest rate environment plaguing the American economy, the stock market has posted some impressive gains so far this year, Walker said. He asked Linneman if this looks like a stock market bubble. 

“It's pretty simple,” Linneman said. “I think there's a giant bet going on between seven to 20 companies, and the bet is artificial intelligence. If you look at other assets, their pricing is not unusual. What's unusual is you've seen this huge rush of money into AI.”

What is going to happen, Linneman said, is AI is going to have a low return on investment. His reasoning? The flood of money into the sector has been so great and so sudden that there is “no way” to efficiently invest it.

“That doesn’t necessarily mean companies are going to completely waste it, so it can generate a return, but [AI] is not going to generate a spectacular ROI, because you can’t invest that much money wisely and quickly,” he said. “I think that's why the stock market broadly is where it's at.”

Linneman said AI's ultimate impact on the economy is unknown. The stock market is likely overvalued if AI ends up being similar to past inventions like electricity or computers, which added about 1.5% to annual GDP growth. But if AI generates an extra 1% to 2% GDP annually, it may not be overvalued. Time will tell, he said.

As for the housing market, the fall edition of the Linneman Letter says that about 70% of the U.S. economy’s failure to return to prepandemic growth trends stems from an undersupply of housing — about 3.5 million units short of demand. 

Sixty percent of the homebuilding in the U.S. is done by public companies, Walker said. But the third-largest builder in America, Pulte, will build only about 31,000 homes this year — far below what is needed to close the gap. The public companies don't seem to be under pressure to increase their production, either, he added.

Regulatory burdens are the biggest hurdles to closing this gap, Linneman said, but on the demand side of the equation, many people are also struggling to come up with a sufficient down payment, especially the younger generations. 

“Young people today have made the decision, and I'm not saying they're wrong, that they would rather go on a ski holiday or Caribbean holiday for a week than to save that money,” Linneman said. “They don't have the money for a down payment quite as soon, and you put the shortage on top of that — home prices are going up, accentuating how big the down payment you need. That's why they're not building [as quickly].” 

On the multifamily side, rents aren't growing as fast as might be expected in this environment. 

Linneman said one reason is that high-growth housing markets, such as Houston and Dallas, carry long-term hidden risk. Optimism in areas like these leads to chronic overbuilding, leaving many properties to lose their competitive edge rather quickly. Smaller markets, such as Detroit, have seen so little construction that when a desirable product pops up, it stays competitive for much longer, despite the area’s overall lack of growth.  

“Obviously, if you have a drop-dead location, you can mitigate this effect,” Linneman said. “But let's face it, you're competing. It's like the NFL. You're competing against a new running back all the time if you're in a market like Houston.”

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This article was produced in collaboration between Walker & Dunlop and Studio B. Bisnow news staff was not involved in the production of this content.

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