This is the Norris group's real estate investor radio show the award winning show dedicated to thought leaders shaping the real estate industry and local experts revealing their insider tips to succeed in an ever changing real estate market hosted by author, investor and hard money lender, Bruce Norris.
Bruce Norris :I thank you for joining us. My name is Bruce Norris and today we have a very special guest, Doug Duncan. Doug is the Senior Vice President and Chief Economist at Fannie Mae where he's responsible for forecasts and analysis of the economy and the housing mortgage markets. Doug also oversees strategic research regarding the potential impact of external factors on the housing industry, and well there's been none of those so that's not been a problem. He leaves he leads the house price forecasts Working Group reporting to the financial committee. Under his leadership, Fannie Mae's economic and strategic research group won the n b outlook award presented annually for the most accurate GDP and Treasury note yield forecast in 2015. In 2016, the first recipient in the awards history to capture the honor two years in a row. In addition ESR was awarded by pulsing pulsing Matic pulse on nomics. Okay for best home price forecasts. The list goes on and on one of the most powerful people in real estate. That's a fact that Welcome back to our show.
Doug Duncan :Hey, glad to join. It's always good to spend time with you.
Bruce Norris :You know what's, you know, I guess one thing I'm going to ask up front because it's been an interesting discussion for California. People that have renter renters in place. There's all kinds of talks about moratorium of rent paying. And so I wanted to first ask what's been the impact of the Coronavirus on delinquencies in Fannie Mae's, you know, pool And I'm just curious how that compares to say 2009 or 10 when it was really at its worst.
Doug Duncan :Are you talking about in the rental space?
Bruce Norris :Or Oh no, no, in the owner occupant, you know, in the owner occupant world destroyed delinquencies in general?
Doug Duncan :Well, at this point, it really hasn't been much because the of the presence of the forbearance program, and then the entrance into the forbearance program is actually fairly straightforward. Roughly, all you have to do is contact your servicer and say that I am suffering a financial hardship driven by the virus, and you can be accepted into a forbearance program. The question and it can take it can be up to a 12 month it's renewable up to a 12 month timeframe. So we probably won't know until any individual loan passes that 12 month time period whether or not it will ultimately go into delinquency and foreclosure. So the, in our set of rules on how that's reported on credit reports and and things like that. So it's, it's TBD. Frankly, what's interesting is there was an initial run up in forbearance, requests, and then things leveled off. And there were actually some households that brought their loan current and got rid of the forbearance. Our assessment on that was that there were some households that simply acted because it was simple. They acted on it as a sort of an insurance in the event that they suffered job loss or some serious income truncation. And when that didn't happen, they reversed out of it because of course it does ultimately need to be approved. Current, whether it's through some sort of a modification or simply they the paid, the borrower pays back the amount they would have paid over that time period. So there's there are rules around all of that. But at this point, it that's not driving delinquencies
Bruce Norris :Because they're not being they're not being counted the same way what percentage of the loans that you have are in forbearance then maybe that was a better question.
Doug Duncan :Um, you know, off the top of my head, I'm not sure within the full market, what that number is, but I can be happy to get that back. It's not, it's lower than what I think some of the initial estimates were wildly high 15 20% dependent on the source that you looked at but it's not Nearly that I think at this point,
Bruce Norris :it's like
Doug Duncan :actually the MBA. I think the MBA puts out some some numbers for the full market, as opposed to just the GSE is less is less than what was anticipated. Yeah, I think it was eight or nine last time I saw it. But anyway, okay.
Bruce Norris :Here's an interesting question in 2020. Have we met the technical definition of being in a recession?
Doug Duncan :We have the National Bureau of Economic Research, which is the governing body which determines the start and end of recessions pronounced that February was the starting month of a recession. So they have not obviously they've not pronounced A into it yet, but we are technically in a recession.
Bruce Norris :Okay. What are the key numbers that let you know you're in a depression?
Doug Duncan :Okay, the humorous thing that people used to say was if Your neighbor loses our job. It's a recession. If you lose your job, it's a depression. So the but a more serious answer is if you were looking simply at unemployment. There, there have been 42 or 43 million claims filed for unemployment insurance, which is the far and away the greatest number ever, of course, the population is much larger than the early 1900s. So you'd have to adjust as a share of the population but the, the initial impulse of job loss was very much like the Great Depression. The what what's interesting is the rebound has been fairly quick, but we're still at under official statistics at 11%. A little over 11% unemployment which is Which is a very serious level, it's not at the deepest level that the Great Depression in the 1930s was, but the initial impulse. So that was there. The the 42 or 43 5 million filings for unemployment insurance is more than all that occurred during the Great Recession recently. And just to give you a little sense of magnitude, prior to this to the virus issue, the largest weekly issuance of claims was something short of 700,000. And in one week, in March, there were 6.9 million that were filed, just to give you a sense of the magnitude a factor of, you know, almost 10 greater than previous all time record, which is just incredible. Some of those unemployment insurance claims that you can expect way that 242 or 43 million jobs lost because the states in many instances, were not prepared to process all those claims. They had never seen anything like that in terms of magnitude. So there's good evidence that some people filed multiple claims because they couldn't get through the system. There were some people that filed claims in appropriately and had to refile. There were people who were not eligible under the rules that filed. So there's a number of reasons that that number doesn't equate one to one to a job loss. But just the magnitude of it gives you a sense of the employment shock that that hit the economy is what separate, kind of separating this experience from any other economic downturn the speed in which it was delivered. unquestionably, it's there's there's no even the Great Depression. There was a gradual decline to very high levels of unemployment, but this was a sudden shock it? No, there is fact that all the charts that you can that you could use to chart the actual data look incredibly strange because the both the magnitude and the suddenness of it. There are no previous examples of, for example, one of the ones I use to give a sense of it is that data I was just describing on the unemployment insurance claims, if you take the whole history of it, in order to get the scale to include the shock now, all prior previous weeks look just like a straight line horizontally. And then you see this straight vertical line. And so the actual data it's just shocking.
Bruce Norris :Yeah, I think I put that in a text to somebody and I said that's the scariest chart I've ever seen. Yeah, it's kind of funny when you're talking about charts and say you're in uncharted territory. That's no joke.
Doug Duncan :Let's chart it in a way people wouldn't believe. No, just it's amazing.
Bruce Norris :So we've had Coronavirus round number one and got some really aggressive government response, aggressive fed response. What In your opinion, did they get right? And anything they did that you're concerned about?
Doug Duncan :Well, the suddenness of the of the job loss, and the magnitude of the job loss did require some response because it would in the absence of some support for that huge number of job loss it would hit consumption dramatic quickly and you can start a downward spiral. So the I think the the PPP which was intended to keep people employed, aligned with the small business associations for administration's efforts to provide credit lines to keep small businesses alive and add in the supplemental unemployment insurance to give some support to consumption where we're really important. Now, you can argue over the degree or the dollar figures, those kind of things because there's pretty good evidence that the 600 a week and supplemental unemployment, insurance payments actually increased the income over what people are some people have been making previously and as discouraged them from going back to work. That's that is not a positive thing. There's all kinds of evidence that that in public assistance, the best position for public assistance is at a level that does not discourage the working poor. Because there is dignity in work and and the health of households is greater in in that environment than in being completely on public assistance. So to the extent that across the line in that place, that's probably if there is another role to play so be some recalibration the the, there'll be a bunch of noise about whether all the companies that got access to to funding deserved access to that. This is one of the one of the things that happens when you haven't blanket national policy. See there's all kinds of regional differences and things. And there will always be stories about about those regional differences and inequities and things like that. That's age old kinds of things. The Fed entered to make sure there wasn't serious instability in dislocations that that moved in the direction that we saw in the 2007 to 2009 time period, that making sure that that the payment systems remains functional is very important. The, the magnitude of the different types of involvement is going to get some scrutiny. The the bond buying activities by the Fed that is buying corporate bonds. It will be seen by some parties as picking winners over losers. That's going to get some scrutiny. The question of how do you actually unwind this expansion given that in the past attempts to reduce the the feds portfolio after the 2007 to 2009 time period caused some illiquidity issues. And then the general issue of how risk gets priced, where there are interventions in market functions that that distort risk return relationships, is I think, also something that's going to get discussed over time. And you could characterize it as though the Fed has added to their to their list of responsibilities, which, by law are minimizing unemployment? And I'm sorry, yeah, minimizing unemployment and hold holding inflation down. Now. They're, they're acting on financial stability and some other things. So I think there'll be public debate about those things. Um, but as I said, any any broad based policy like that has places you can you can criticize it.
Bruce Norris :All right. You know, I think the speed at which it happened. I think that was part of if it's an overreaction it might not have seen like that on that day.
Doug Duncan :So yeah, that's true. Yeah. No, no one will question. The fact that, frankly, both the legislative process and the decision central banking process acted with with great speed. And impressively,
Bruce Norris :It was that, you know, in a in an era of pretty much no cooperation, they got something done. That was pretty important. Yeah, so now the PP program PPP program has basically ended refer this round. So what do you think is next for the unemployment rate?
Doug Duncan :Well, to go back to the unemployment insurance claims discussion last week, and that comes out every Thursday morning at 830. Last week, the I'm sorry, the last two weeks, it's been at about a million and a half new claims filed, as I pointed out earlier, prior to the COVID, that the highest we've ever had been about 700,000, a little less than 700,000. So we're more than double that. Still, that suggests that there's still stress, significant stress in the employment market. So while we went down from 13.3 to 11.1, in the most recent month in terms of the unemployment rate, it's the unemployment insurance claim suggests from here It might be gradual, the pace at which declines are forecast for the end of year unemployment rate is about 9.3.
Bruce Norris :Really.
Doug Duncan :So that's only about two full percentage points lower than we are now.
Bruce Norris :Do you consider especially in this latest cycle that we've what we've experienced? Do you consider U6 employment chart more important than U3?
Doug Duncan :Just describes a different thing. Yeah, I don't know. That one's more important than the other they they describe different issues and give you a different sense of the dynamics of what's going on. In in the employment category, one of the things that I watch is the the number of people who are working part time for economic reasons, right? Because that suggests there they would like to be working more, but they can't. And those numbers are still very high. And not surprising. And with an unemployment insurance, I'm sorry, unemployment rate of 11.1%. Not surprising, there'd be a lot of people working part time that would rather work full time. That that both that the usage on most of the the various components of employment to population ratio, the workforce participation rate, all of those things we try to aggregate, at least in our thinking, to give us a sense of momentum and also of income curtailment. And, you know, we're in the mortgage industry. So if someone has a mortgage and their income is curtailed, it's back to what you were asking about earlier. What do we see in the delinquency in the delinquency world? So that's typically what we're watching. For example, right at the moment, the stress in in the housing business is on the rental side of the equation because the probability of someone being an hourly wage worker is higher that they would also be a renter. And if they are a salaried worker, they would have a higher probability of being a homeowner. Okay. And so what the bulk of the job loss initially was in the hourly wage worker category. So that's, we've been watching the there's some data out there. The National Multi Housing Council, for example, puts out some data on what's your rents in some 11 million rental properties are being paid on time. The concern is, when the $600 a week, unemployment insurance runs out on the 31st of July, they may make their August rental payment, but maybe not September, okay, unless there's some additional stimulus. So that's kind of how we patch together the composition and momentum of employment with what's happening with income. And now that might impact sectoral components in the economy.
Bruce Norris :Coronavirus round two. So we've had states roll back some openings so you have restaurants that are now re closing. So I guess I wanted your thought on that. Is there going to be maybe a PPP round number two, or do you think this round Coronavirus round two will really increase the closure of a lot of businesses.
Doug Duncan :As I understand it, that there has been a second round to the PPP and not all of that has been subscribed. In other words, there's still some available for people for businesses to take down. So with that being the case, it's it's unlikely there would be a third round of that unless for those firms that had it. had that took the PPP there. They were impacted a second time and somehow the Congress and white house could conclude they could control for that, to extend additionally to those firms, the way I'm thinking about the virus is that we're not some people are calling it a resurgence. I would not call it a resurgence. I would call it a geographic shift. Because more of it has been simply that the virus moved to the south and west, from the northeast and the Northwest, to areas where there had not been a pickup and now there's been a pickup in some instances, it is true, that easing has generated a resurgence. So it's actually a mix of the two but the bigger thrust to my way of thinking has been the geographic shift. The reason I divided that way is because people are they're using various visuals to try to characterize the path of the economy. So they'll say, is it going to be a V shaped recovery is it going to be a W shaped recoveries are going to be a Nike swoosh will appear an l will be a square root, you should probably probably think of a few other ways of thinking about it. And the W, that is a hard decline, then a partial recovery, then a return decline before a full recovery is conditioned on a couple things. One of them being this resurgence question of the virus. And, and yes, you're seeing the reversal of some easing criteria, because they're when things were eased, there was a pickup in the incidence of the disease. So that would sort of align with the with the W view. But it's that's different than the fact that you hadn't seen much in Texas or Florida, or Arizona, and all sudden now you are. That's the first time you've seen that there. So if if New York picks up again, if Seattle picks up again, that would be a resurgence or a second round, which some people aren't drafting off what happened in the 1917 1918 time period, where there was a second round, and actually the mortality rate, I believe, if I remember the history of that correctly, think the mortality rate was actually greater in the second, the second pass. Yeah, I think so. Yeah. So that's, that's why that concern? I think, so would the will there be fiscal policy to address small businesses again, Yeah, potentially potentially.
Narrator :For more information on hard money, loans and upcoming events with the Norris group, check out the Norris group comm for information on passive investing with trust deeds, visit TNGtrustdeeds.com Transcribed by https://otter.ai