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Bruce Norris:Hi, thank you for joining us. My name is Bruce Norris and our special guest is Douglas Duncan. Douglas is the Senior Vice President and Chief Economist at Fannie Mae where he's responsible for forecast analysis of the economy and the housing and mortgage markets. Duncan also oversees strategic research regarding the potential impact of external factors on the housing industry. He leads the house price forecasts working group reporting to the financial committee. Under his leadership, Fannie Mae's economic and strategic research group ESR won the NABE Outloo Award, presented annually fo the most accurate GDP an Treasury note yield forecast i both 2015 and 2016. The firs recipient in the awards histor to cap-, to capture the honor t o years in a row. In addition, E R was, was awarded by Pulsenomi s for best home price forecas. Named one of business and, Bloomberg business week's most, 50 most empowered, po erful people in real estate. Du can is Fannie Mae's sour e for information and analy is on demographics and ex ernal business and ec nomic environment, the implicati ns of changes in economic activ ty on the company's strate y and execution and for forec sting overall housing, econom c and mortgage market activity. Doug, we welcome you back to our show. And boy, what a year to be an econ
Doug Duncan:It's great to be back. And it has been fascinating. You know, from, from a data perspective, some a whole array of unprecedented kinds of things that happened in in 2020. And of course, still, so that will be recaptured in 2021. So, yeah, it's fascinating time to be in this space.
Bruce Norris:Well, that's interesting, because, uh, you know, in preparation for this, I, first of all, you're doing it monthly. So, well, you had a front seat to the immediate impact, because, because I pulled up January 2020 projection, and then those sheets, you have basically a two year projection out to say, this is what we expect a lot of categories to be. And one was pretty consistent. It was 2% GDP growth, you know, plus or minus a point here or there for pretty much two years. And then all of a sudden Coronavirus hits. Have you ever had any, anything impact something so suddenly and so severe?
Doug Duncan:No. And in fact, I have a chart, I'll send to you that shows the unprecedented nature of the impact of the virus on employment. It's a, it's a line that over two months drops almost straight down. The most massive sudden change in employment in, really in modern history, even even including the depression, when the job losses were significant and higher, but not at the same pace. It's just there's nothing like it very amusing.
Bruce Norris:And what was interesting to me, too, now I looked at January 2021 sheet just like there was a year before, when I found out I found very interesting is projecting out to GDP for all of 2021. And then 2022. There's a projection of about 5% for 2021. And something like three 3.6 for 2022.
Doug Duncan:Yeah.
Bruce Norris:That's, when's the last time we had a 5% year. I mean, it's gotta be..
Doug Duncan:Reagan Administration, probably. During the Reagan Administration, we had I think one year that was north of 7%, after the, all the supply side tax cuts, but nothing, nothing in recent history at all. And that, it', the story on that is really wh t assumption you make about t e vaccines. So, in our forecas s, we make an assumption that t ey will be distributed broad y, they will be effective, and t ey will be resilient, and this w ll be in place by the middle of he year. So, that June, July timeframe. If you lo k at consumer savings rates, you look at the equity in homes, you look at the equity in the tock market, consumers have a l t of resources to put to work And that's even without the exi ting stimulus, the stimulus t at's being discussed. So, it to et to 5% growth for the full y ar of 2021. It means you're gonn have to have the 7% growth for he second half, because the irst half is going to be omewhere in the three to 4% ange, we think. Now if if eople's response is earlier, hen we'll you know, you'll see, see that in the, in the GDP data or if the their response to th to the vaccine is more cautious then you'll see that bleed bac into 2022. This is the, this s the difficulty of this foreca t environment, you're forecasti g based on a variable that's n t economi
Bruce Norris:Absolutely.
Doug Duncan:It's a health variable, right. And we have no history of this.
Bruce Norris:Right.
Doug Duncan:Because our forecast model is only as good as it's, the past data it's seen, which was similar. And therefore it can draw conclusions about what might happen about the future in this circumstance. Well, we have no past data on this.
Bruce Norris:What was interesting to me at the end of 2019, gonna be specific about California because it's what I know best. It had the best set of charts literally ever, unemployment as low as ever in like the last 50 years, no foreclosure competition. And yet, we had virtually no price increases, the median price went up like two or 3%, with all those charts, perfect. And then we get into 2020. So if you're looking at 2019, and December, looking out at 2020, you think they're more of the same be fine as far as the economy and all that. Well, then you get this surprise, that takes out ridiculous numbers of jobs. And within a couple months after that the real estate market completely explodes and goes up 17 and a half percent. I mean, is it I? I guess I, I don't have a chart for that. That and ending if you know what I mean? What is, what is your take on why that happened? Because the there was so much more uncertainty at that point than they would have been at the,uh in 2019. So, I'm just curious what your take is?
Doug Duncan:Sure it is. It's a fascinating story. It has to do with which jobs were lost and why. So, the jobs that were lost were in services categories that are supported by discretionary spending for middle and higher income households, going to restaurants, staying in hotels, flying in airplanes, going to sporting events, going to theaters, all of those are places where the fear of the virus because of the aggregation of people that are required to acquire those services. People vacated the premises and huge job losses in the service in that sector of discretionary spending. The people that are employed in that space are largely hourly wage workers. And hourly wage workers are heavily renters. So, if you're a salaried worker, the risk to your job which was revealed in a month or two was fairly minimal. But if you are an hourly wage worker, you are in trouble. If you look at the homeownership rate of hourly wage earners in that services sector that I'm talking about, it's 43%. So..
Bruce Norris:Okay.
Doug Duncan:This was a rental story, right? So, we looked in March, when addressing the board of directors, they're like, what do you think is going to happen to house prices as it, as the virus was unfolding? We did a quick analysis, again, with no historical data. And we said, well, maybe prices might go down a percent or so. Then in April, we now have two months of our National Housing survey of 1000. We survey 1000 households a month we've been doing that since 2010.
Bruce Norris:Right.
Doug Duncan:From March to April, what became clear was that for existing homeowners, that is people who had house, they were much more afraid of the virus than were people who were potential first time buyers. Interest rates plummeted.
Bruce Norris:Right.
Doug Duncan:So,the people on the supply side, existing homeowners are on average older than first time homebuyers. So, they would be more afraid of the virus because it had been revealed it was more serious for older households, it became clear the supply side was going to be more constrained than the demand side because those historically low interest rates were a real spur if you were a salaried worker, with the potential of becoming a first time homebuyer. So, we said t the board, we said, 'Look, t e number of sales are going o fall because people are worri d and they're not going to go o t and mix with other people. B t we expect the supply side o fall further than the dema d side and if that's true pri e will go up.' Well then he industry adapted to things wh
Bruce Norris:When I, when I started looking back at this, I ch used to be done in person, a ot of them that very quic ly figured out how to do t em remotely. And so they, they w re able to patch togethe a technological solution for s me key points of interperso al contact, and the market star ed to recover very quickly. nd it's been the case that he supply side has grown much l ss rapidly than the demand side. So, for example, existing h mes nationally 1.9 months suppl, I mean, that's just crazy. An so, the demand side very st ong, because those interest rate you can get it two and hree quarters percent 30 year ixed rate mortgage rate, when ould you ever get that? R kind of came to the similar conclusion in that there was two groups of that had urgencies because in California at 45% of the listings disappeared.
Doug Duncan:Yeah.
Bruce Norris:So, those people, those people were just going, Okay, we don't want anybody tour in our house.
Doug Duncan:Exactly.
Bruce Norris:We're staying. As a matter of fact, we're gonna refi our house and just stay. So, that's off the market. But you had another group of urgent buyers that had to make decisions wanting to get out of wherever they were. What was fascinating is that for a long time, this has been the explanation of California's kind of modest sales, we've had 400,000 sales for about the last 10 years plus or minus, where a good year would be 500,000 sales. And the explanation was, well, there wasn't enough inventory. Well, now inventory is down 45%, and you managed to get to 120% of 400. So, you sold 22% more houses in 2020, despite all this stuff on 4, 55% of the inventory. That's uh...
Doug Duncan:One of the other things, of course, is because people are not spending that in the discretionary categories. They have cash. And yeah, I got the same thing for my wife. She came in one day and like July or so, why do we have all this money in the checking account? I said, you probably noticed, I haven't, I have not flown to Washington once since March. And she's like, Oh, yeah. So, people also have cash balances. And, and, for example, if you live in an urban core, where you can't buy a single family house, but where there are concentrated groups of people and you might be afraid of the virus, now might be the time it was gonna be two years from now I was going to move out to the suburbs, but now might be the right time, because interest rates are low, I've got the cash, I'm afraid of the virus. And we've got data that show that that actually happened that because we can track the location from which the application is made, and the location of the property for which it is made. And you can see in San Francisco, in New York City, in Boston, places that have that significant urban core, definitely a flight out to less densely populated areas.
Bruce Norris:In a way that GDP growth numbers being so strong are kind of saying we're going to make up for lost time. But the kind of spending that was mistake, we're missing like I couldn't go get a haircut, I couldn't go to a movie. I couldn't take a cruise. I couldn't go to a baseball game. They can't like cre-, increase uh, let's say the baseball season to 320 games. So, I'm still only going to have if it's got a baseball season is still only gonna be 162 games. So, where does all this like really aggressive GDP come from?
Doug Duncan:Well, it is it is true. It's difficult to go to a restaurant retroactively.
Bruce Norris:That's right. Or get a haircut.
Doug Duncan:That's right. So, the question is, what do people do with the cash because it's sitting, the savings rate today is 50% higher than the normal level. So, what are people going to do with that cash if they can't put it into discretionary spending, because the restaurants aren't open at all, and the sporting events aren't on and all that? Well, there was, has been a very strong recovery in the auto industry, for example, they've done very well, not quite back to the peak pre recession, but pretty close. The reason they're not back to the peak is the number of miles being driven is down substantially so, now hanging out their cars is fast. I've seen insurance companies give rebates because accident rates were down because the miles traveled had fallen so significantly. So, that's one place people are using that money for very low interest durable goods. So, you can get 0% financing on almost any automobile today for 5, 6, 5 or 6 years. And it's a durable good. So, if you're, if there's some sense that it's time to replace your vehicle, it's a great time to do it from that perspective. You've got the cash, and then there's no interest rates if you want to do it on credit. Housing is the same, it's a durable good, right? So, it very advantageous financing. Now, with the exception that for a lot of households, the price increases have offset the benefit of the interest rate declined.
Bruce Norris:Correct. Right. monthly payments, basically, it's the same.
Doug Duncan:Yeah, that's that's correct. So, the the real question about whether the forecasts of dramatic growth will be right is the question about how do people feel about their ability to get the vaccine, that the vaccine will be demonstrated to be effective, and it will be resilient to the other strains of the disease that have started appearing in and if all if they're comfortable with all those things, that I think as fast as the restaurants can reconstitute themselves, and as, as fast as people are comfortable, recongregating at baseball games, in theaters, those kinds of things. That's, that's, what the assumptions are behind the growth expectations.
Bruce Norris:Okay.
Joey Romero:Can I ask you a question about that. The assumptions that you had?
Doug Duncan:Yep.
Joey Romero:Um, stimulus that wasn't a part of the forecast. Am I correct?
Doug Duncan:We, in our, in our next one's forecast, we will put in the something approximating the $1.9 trillion, that it because it has passed with a couple of changes in both the House and the Senate. So, it looks highly probable. But the forecast you have in front of you, does not include that 1.9 trillion includes everything up through December. So, if you add to that..
Bruce Norris:Wow.
Doug Duncan:1.9 trillion. That raises two questions. One is, can economic growth absorb that? And at what level and in what categories? And second, does it become a, an inflationary issue? And and you will see in the in the current forecast, if you look at our 2022 number on inflation, you see that we do have some inflation forecasts in 2022. That's before you add the 1.9 trillion. So, that will be in this forecast update. That's that will be an issue that we will have to address.
Joey Romero:How long do you expect it to be this fluid?
Doug Duncan:Well, the Fed has been, I'm assuming you're, you're like all the other economists or people I know who are economists that when the Fed does a press conference, you're glued to the television. Well, maybe not. But I am. And several times in the course of his in the Q&A section. Chairman Paul was at pains to say the economy is nowhere near where we want it to be. Because there are 9 million more unemployed people than there were before the virus, and they're not fixed. So, and he said that we have no current plan to change monetary policy, which means the Fed is buying $40 billion a month of mortgage backed securities $80 billion a month of US Treasuries, and they're holding the Fed Funds target rate between zero and 0.25%. If you look at the what's called the dot plot, it's a it's an aggregation of where each of the members of the committee think rates will be at different points in time, you don't see them increasing that Fed Funds target rate until after 2023. That's a long period of very liquid markets. And it is raising questions in people's minds about whether you're getting asset price appreciation, because if you think about the way people price assets as the the net present value of the cash flows they expect to receive from that asset. If the interest rates are close to zero, the asset value goes way up. And that's one of the reasons people are questioning whether the stock market can stay where it is. And there are people that are starting to question whether that's a factor in most cases as well.
Joey Romero:Wow.
Bruce Norris:When you hand $1.9 trillion, it's a basically what closing in on 10% of an annual GDP.
Doug Duncan:Yeah.
Bruce Norris:The group that you hand that to are they, at this point more likely to spend it, save it or pay down debt?
Doug Duncan:That, that's the theory is that, that most of it will go to people who's what economists called marginal propensity to consume. That is they're the most likely to spend it. That's the, that's the theory on this stimulus is that it will go to those people and they tend to be lower income people. They have those salaried, I mean those hourly wage worker, folks that I was talking about. Because that, because they have lower incomes, their consumption out of whatever income they have is a higher proportion. So their savings rate is lower. And so that would actually come into the economy faster. That's the theory.
Bruce Norris:Okay. When when you have the stock market booming and real estate going up and all that we have we all have, let's say more equity, is that typically just sit just sitting there? Or does that now translate some into larger or luxury asset purchases, that type of thing.
Doug Duncan:In this case, it may well go until the whole vaccine issue is solved, it may well go into those more luxury durable goods items. That's, that's the real key is getting it back into the discretionary spend, which is where those folks that have the lower income hourly wage jobs are and then to solve. Chairman Powell's 9 million jobs, that's going to have to people are going to have to get comfortable with that discretionary spending in places where they're going to be sitting next to other people.
Bruce Norris:Okay.
Doug Duncan:Ultimately, that will have to happen.
Bruce Norris:So, the Feds kind of committed to very low interest rate on the short end of the spectrum. Do they control the tenure?
Doug Duncan:Well, that's a, that's a question that was framed by Japan's move a number of years ago to yield curve control where they've conducted monetary policy to, to buy securities in sufficient volume to hold rates down where they want them, the Fed is, the Fed, U.S Fed is kind of danced around whether they're willing to do that. They have not they've not been danced around the issue of negative rates. They said we don't really see them having the benefits that are claimed, but they've kind of danced around the yield curve control question. So, I think they if rates spiked, suddenly, Chairman Powell was on the board when the taper tantrum happened back in 2013.
Bruce Norris:Right.
Doug Duncan:So, what that did to the housing market, he answered a couple of questions in the press conference about that, in particular, has monetary policy created asset value inflation and housing? And his answer to that I'm paraphrasing here was the answer is no, it's a supply demand issue and house price increases will slow. So, he was suggesting it wasn't a function of monetary policy. But it with regard to interest rates, that, that's a question that is being raised. Is that impacting the asset values in housing? And will the Fed act to maintain low interest rates going forward? Well, remains to be seen.
Bruce Norris:Okay. Overall policies that could impact housing. I don't know where you stand. Do you think that, do you think we'll have a higher federal tax rate? At by the end of the year? Income tax, income tax?
Doug Duncan:I'm doubtful they'll get it through this year. But that's, it's a guess that, that's not politically that's more difficult, obviously. And their mind today is on, on the stimulus side of the equation.
Bruce Norris:Okay.
Doug Duncan:Let's say they won't put it in frame up the structure of it. There's both the I would say on the tax side, there are three things. One is corporate tax rates, they talk about that campaign. The second one is high income, marginal tax rates. That was the second one and the third one was the state local tax deduction question. I think all three of those are on their mind whether any of those three go through within the this calendar year. I, I would say the probabilities are not high, but that doesn't mean the groundwork won't be laid.
Bruce Norris:Okay. There's a talk of a $15,000 Tax Credit.
Doug Duncan:Yeah.
Bruce Norris:For first time buyers. Is that, what impact? If that passed, what impact do you think that would have on housing?
Doug Duncan:House prices would go up?
Bruce Norris:Okay.
Doug Duncan:We ran an experiment. We're in a market that is constrained on the supply side. It's a demand side factor. If you increase demand, and you already have a supply restriction, only one thing can happen, prices go up. We ran that experiment in 2009 and 10. Yeah, if you go back and you look at the housing construction data, what you'll see when that first time tax buyer, first time homebuyer tax credit was passed in 2009, there is a spike in construction. It was renewed in 2010, there was another spike in construction. When it expired, the construction level fell back to what the trend line was prior to passing that that temporary tax cut. So, two things one is, as I mentioned, is a supply constrained market, it's a demand side push, that's going to push price up. The second thing is any tax change, which is temporary, generates temporary changes in behavior. If you would like to change behavior permanently, then you have to put in place a sustained change, because then households change their, change their planning horizon to accommodate that long term change in the environment. So, I'm skeptical. We've got experiments that show what happens when you make temporary moves. The Bush administration, W. Bush administration, did a one time rebate, no impact on GDP, the Obama administration did a one time rebate, no impact on GDP, people change their behavior when there's a permanent change in their planning horizon.
Bruce Norris:Okay. It's been a long time since we had immigration law changes, I think, is that is that Reagan? I think it's way back at Reagan.
Doug Duncan:Fundamental reform was in the Reagan administration.
Bruce Norris:Right. So, if. Do you see anything like that coming? And do you think what would be the impact on housing for that?
Doug Duncan:Well, I think there is, there is going to be some change in immigration policy, whether it's comprehensive legislation or not, I don't know it's more difficult to pass comprehensive legislation the founders of the country made that made it difficult. So, so, they did a good job on that front. The the demographics in the US in terms of long term demographics are dependent for the replacement of our population on immigration. Immigrant population has larger households, the birth rate of the US domestic population is 1.9, live births for birthing age women and replacement is 2.1. So, over the long term, absent immigration, we would have a gradually declining population and aging so, that the workforce would be shrinking, and there would be less workers per retiree to support, for example, our entitlement programs. So, there's some serious reasons to give thought to how to normalize or what's a, what's a strong immigration policy, that means the various conflicting views of which they're significant.
Bruce Norris:Sure.
Doug Duncan:But bottom line is, from a workforce perspective, we will need to give serious thought to immigration and that will of course, bleed over into housing. Right?
Joey Romero:And that's gonna do it for part one of our interview with Doug Duncan, Senior Vice President and Chief Economist of Fannie Mae. Hope you join us next week.
Narrator:For more information on hard money, loans and upcoming events with The Norris Group, check out thenorrisgroup.com. For information on passive investing with trust deeds, visit tngtrustdeeds.com.
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