Doug Duncan is Senior Vice President and Chief Economist at Fannie Mae where he is responsible for forecasts and analyses of the economy and the housing and mortgage markets.

The Data Driven Real Estate Podcast #14 - Doug Duncan, Chief Economist of Fannie Mae #DDRE14

Written by:
Aaron Norris
Written on:
October 1, 2020

Douglas G. Duncan is Senior Vice President and Chief Economist at Fannie Mae where he is responsible for forecasts and analyses 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 Forecast Working Group reporting to the Finance Committee. Named one of Bloomberg/BusinessWeek’s 50 Most Powerful People in Real Estate, Duncan is Fannie Mae’s source for information and analyses on demographics and the external business and economic environment; the implications of changes in economic activity on the company’s strategy and execution; and for forecasting overall housing, economic, and mortgage market activity. Duncan received his Ph.D. in Agricultural Economics from Texas A&M University and his B.S. and M.S. in Agricultural Economics from North Dakota State University.

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Show Topics

  • 0:00 The Data Driven Real Estate Podcast welcome Doug Duncan, Chief Economist of Fannie Mae
  • 01:30 What is the Economic and Strategic Research Group? What do they research?
  • 03:43 A look at affordable housing, flood zones, and homes at risk via Fannie Mae’s research
  • 08:18 How does Fannie Mae’s team approach research?
  • 08:29 How Fannie Mae’s research helped 250,000 during the Great Recession access HARP
  • 11:27 Does data show people are moving out of urban areas?
  • 12:04 Will the data show only to the major metropolitan area, or will it go deeper?
  • 12:26 Early findings show interesting Covid related impacts to the multifamily market and not in a category most would think
  • 14:10 Does Fannie Mae, Freddie Mac, HUD, and Ginnie Mae work together on research?
  • 15:34 The economic impact of Covid-19 and what the next 12 months look like
  • 18:29 Fannie Mae’s board was surprised by this early pandemic prediction on housing
  • 18:51 What the survey of 1,000 consumers has thought us about housing prices
  • 19:53 Where the majority of the job losses is concentrated
  • 21:12 What are Doug’s concerns about the supply and demand of new homes?
  • 22:22 Key issues with the supply-side of housing and housing-building profitability
  • 23:13 Savings rates have gone from 32% to 20% (normal is 8%)
  • 24:48 Where does the over economy stand now in 2020?
  • 25:09 The one data point Doug wishes he had about small businesses
  • 28:33 Unemployment forecast for 2021
  • 30:07 The argument that housing is consumption rather than savings
  • 32:37 The argument people make to show homeownership not being important
  • 33:06 The number one hurdle people have to homeownership
  • 34:44 The sale and leaseback option of the new single-family rental investment companies
  • 35:11 Is Fannie Mae beginning to do more research on manufactured homes?
  • 36:31 Modular and manufactured housing and ways public builders are modernizing construction
  • 38:47 Is Fannie Mae looking at special lending for accessory dwelling units?
  • 39:21 Why lenders, government entities, and lenders might not want affordable housing
  • 40:50 Upzoning and current experiments to create more affordable housing
  • 42:45 Why California has resorted to stripping local control for affordable housing
  • 43:55 Base lending on area income to keep a cap on limits?
  • 46:23 Is local and state taxation policies a concern to Fannie Mae as entities struggle from Covid and a recession?
  • 49:49 Nevada looking into an income tax to plug budget deficits?
  • 50:14 Two data point we should be looking at for a better economy
  • 50:58 Some things that may never go back after Covid
  • 53:28 Can the federal government keep printing money with no ramifications to the overall economy?
  • 54:13 Debt-to-GDP ration close to WWII era?
  • 55:06 The three ways to fix a deficit
  • 56:14 The Fed’s evolving rules on inflation and what we haven’t been told yet
  • 57:09 How low will mortgage rates go in the next 12 months?
  • 59:31 Will the Fed explore negative interest rates to stimulate the economy?
  • 1:02:11 The difference between a policy buyer and an economic buyer
  • 1:02:41 Will there be a wave of foreclosures in 2021?

Show Transcript

Aaron Norris  00:01

Hey, welcome to the Data Driven Real Estate Podcast, episode 14. We are thrilled to have with us today Doug Duncan, Chief Economist of Fannie Mae. He does the analysis and forecasts for the economy and the housing and mortgage markets. Duncan also oversees the strategic research regarding the potential impact of external factors on the housing market. And he leads to house price forecast Working Group, which reports to the Finance Committee, he’s named one of the Bloomberg’s and Business Week’s 50 most powerful people in real estate. And today, we talked about everything from impacts of COVID-19 to his forecast on the economy, and the data that they’re watching to stay out of politics and really focus on what’s ahead for real estate, and how real estate is actually one of the bright spots. We talked about how low-interest rates can go and the likely the likelihood of foreclosures moving forward. You’ll definitely want to tune in this week. Hey, welcome to the Data Driven Real Estate Podcast, the podcast for real estate professionals dedicated to driving business using data. I’m Aaron Norris, we’ve got the co-host of with Sean O’Toole with property radar. And we are so excited today to welcome the chief economist of Fannie Mae, Doug Duncan. Doug, how you doing?

Doug Duncan  01:05

I am doing well. Thanks for inviting me. Glad to see you guys again. I guess I missed our annual get together at the fundraiser. But

Aaron Norris  01:16

I Survived Real Estate. I know dad interviewed you recently. And you we miss it too. We’re coming up with something different this year, but hopefully back next year, but what are you gonna do COVID-19 has just ruined everything. I wanted to start by asking you, can you talk a little bit about the Economic and Strategic Research Group within? Is that strategic strategically positioned within Fannie Mae?

Doug Duncan  01:40

Um, yes, we, I think of it as a kind of a smallholding company at the corporate level. So it does, we do coordinate corporate strategy. And that’s like eight or nine people, we have a forecast team that takes input from almost all of the staff, but is probably about four staff, or five, if you include me. Then we have a multi-family research team, which is five or six people into that we have a survey team of four or five people. And we have an industry analysis people. So altogether, we’re somewhere 40, or run 40 people. So it’s a little bit of an unusual chief economist job, most corporate chief economists will have five to 15 people depending on the size of the organization. So they’ve, for whatever reason, put together kind of a broader team. And we one of the things that they expect to get out of it. His thought leadership, in other words, thinking about things ahead of others, that that might become important. And probably the biggest issue there is the whole supply question which we started discussing way back in late 2013, into early 2014. And now has been the mantra in the housing industry for at least three or four years. So so it’s a lively, fun group of people that bring a lot of ideas to the table and toss them around in so, all solid. On…

Sean O’Toole  03:19

On thought leadership, what would be like some practical things that you know, might impact consumers or other folks that will come out of your group and then get formed into, you know, some sort of all CEO, Fannie Mae,

Doug Duncan  03:32

I’ll give you the most recent thing, which is still, in many ways under discussion, early discussion in the industry. But four years ago, I went around the company. And I asked the question: What do we know about the share of affordable housing in the United States that’s at risk of flooding at any point in time. Turns out, we knew very little about it, because the responsibility for the placement of flood insurance risks with the servicer. So at the company, we really didn’t know much. And so we started some research into that and have now we have a body of research that talk that understands, broadly where flood is within natural hazards. It’s it’s actually 80% of losses, from natural disasters, and some sense of where it is important. And we’ve run some experiments with catastrophic risk assessment firms to try to get an understanding of the science behind how those things are measured. There’s a long ways to go, but we’ve handed it more into the policymaking arena these days. And there’s nothing formally yet but that’s an example of where we, where we got started.

Sean O’Toole  04:46

And with that data at some point, I don’t even know if this is possible. I could at that at some point, could that end up with Fannie Mae saying we won’t lend in these areas because of flood risk or you know what would be the ultimate outcome there?

Doug Duncan  05:02

I think the question is, what does the insurance business? Where are the gaps in insurance? Because, for example, in Harvey, the hurricane that hit Houston, a high percentage of the flood damage properties were not in the National Flood Insurance Program flood zones. And so whether an individual household they had flood insurance or not, was really not a mandated issue. Because it wasn’t within the National Flood Insurance Program. So it’s not so much that Fannie Mae will issue orders, but rather that the entire industry, and consumers will have to come to terms with the changes in risks in that area.

Sean O’Toole  05:48

Interesting. For a homeowner that doesn’t just finish up on this, and then we’ll move on. But for a homeowner that doesn’t carry, you know, flood insurance, which I think is unfortunately probably a lot. You know, they suffer a catastrophic loss, but they have a loan on that. Does Fannie have like some overriding flood insurance that helps protect them? Or would they if that homeowner didn’t choose that insurance? Would Fannie ultimately suffer that loss?

Doug Duncan  06:21

That we do all the time, what I found out when I did my initial investigation was those places where we had information on flood was where the loss to the homeowner led to a foreclosure. And so we got involved in in the credit side of things. But if you if you have take out a mortgage on a property that is in the flood zone, you must have National Flood Insurance.

Sean O’Toole  06:49

Right?

Doug Duncan  06:51

That is a requirement

Aaron Norris  06:53

I was always been very fascinated with you and your work and you operate in political spheres, but somehow you’re able to stay out of politics. How do you do that?

Doug Duncan  07:06

Well, part of it is having grown up in a family where politics really didn’t affect things. It’s when you got your work done. I was a farm, and you didn’t need if you didn’t work. So if my family was not a particularly political family, I mean, they voted, they were responsible citizens and all that, but that wasn’t what drove the interest more. So it was how’s the community doing? What’s our role in the community? are we are we participating appropriately? How do we help people? Very much church going family, that kind of thing. So I don’t like people. I’m, I’m a kind of integrated personally, but I like people. And I like working with people, sharing ideas with people, that kind of thing. And the political Yes, if you work in Washington, there’s politics all around you. But you don’t necessarily have to get to be aware of it that you don’t have to play in that in that arena.

Aaron Norris  08:14

You’re in it, but not have it. I like it. All right. What does it look like? When do you guys all 40 of you sort of get in a room and decide like, what’s the coolest data that we can go after? How do you, What’s the genesis of your process of starting new projects?

Doug Duncan  08:29

Oh boy, well, we… there’s two or three sources. One is, for example, in the middle of the 2007-2009 crisis, Timothy Mayopoulos, our CEO, and I were on an elevator, and he looked at me and he said, You know, he said, Do we know who in our portfolio has a loan that’s eligible for HARP and hasn’t taken it up? That’s a data request. Right? So I said, I don’t, but I don’t know why we wouldn’t. And so we then identified all the loans in the portfolio that were eligible for harm. And we contacted all the people through a survey and asked them, Why haven’t you taken it up? Man? Did We Learn a bunch of things, all kinds of misimpressions not understanding the program offerings, all kinds of things. By the time we were done with that and recast the communications on that we brought about three-quarters of a million more people into the art program. So that’s one, one source, somebody asks a question, it begs for data. Another one might be that we’re working on a project, we had decided at the outset of this supply discussion. It’s possible that we’re setting rules that would inhibit the development of supply. For example, if you think about a condo building, we have rules about the occupancy rate that has to be there before we would offer financing. So one of the questions was, does that rule have merit? Or should we actually change that because we’re inhibiting the growth of supply So that became a data question, we dived into research on condos in the background?

Sean O’Toole  10:04

Answer on that one? Dd you get to an answer on that one?

Doug Duncan  10:09

We did we choose not on, I don’t know that it was the share that had to be sold. But we didn’t change the rules on condos, to improve the financing possibilities. Um, another situation might be that a lender calls us and, for example, we had have had both letters and reporters that have called and said, Is there evidence that the COVID is leading people to exit the urban core? And what do you think will happen to house prices as a result? Well, that’s a request for data. So we’re, we’re investigating that at present. And we can see clearly in at least four metropolitan areas, that is a factor. But you also have to adjust for the fact that the millennials were already moving out of the urban car starting three or four years ago. So the question is, is it an accelerator of a trend that already existed? Or is it driven by a new set of factors? That’s a data question, right? Those three different angles at which data comes at us. And sometimes we’re just sitting and thinking about things and saying, I wonder if there’s data available to answer this question that we thought of ourselves?

Sean O’Toole  11:27

What do you think you’ll have the answer to that question on the exits from the urban areas?

Doug Duncan  11:35

We’re getting pretty close. We’re confident in saying that San Francisco, New York, it’s it’s pretty clear, there’s a there’s a trend there that didn’t exist pre-COVID. It looks like Boston, Chicago might have similar characteristics. I would say within the month, we’ll we’ll say something more formal, because we’re, it takes us a little time to work through the data to get to the metro areas.

Sean O’Toole  12:04

No, we we only do that to the metro area, will you be able to dive down and say, okay, you know, within New York, right? The single-family residential, the low-density residential, it’s not happening, but the high density, high density, high rise residential, it is happening or at that level, or is there more at the MSA level?

Doug Duncan  12:26

Right now it’s at the MSA level. But we have an interest in knowing it below the MSA level, because, you know, we finance properties all across most Metro boundaries, both single-family and multifamily. Things in the multifamily side that we’ve been looking at is lease renewals. So in and you know, you divide multifamily into a, b, and c, where A is the higher income B as middle income, and C is lower income, lease renewals, and B and C properties are maintaining the same pace, but they’ve fallen in the A properties. So when we looked into that, what’s going on is those are the people who are most likely to have the resources to buy a house, or at least to relocate. So people are canceling or letting their leases expire in a property’s moving out, we can see that they’re moving to less densely populated area either buying or renting, which leaves a elevated vacancy rate in those eight properties that generates reductions in rents. So if you want to stay in that urban center, but want to lease a property, you might drop your lease and take a discounted lease in another property. So it’s a little bit of a musical chairs exercise, because one segment of borrowers is opting out. So that appears to be one of the dynamics that’s underway in some of the submarkets.

Aaron Norris  13:57

Do you and Freddie Mac and the other entities that you know, do federally-backed mortgages, do you all work together? Or do you just have the coolest game in town?

Doug Duncan  14:10

Well, there’s a lot of a lot of interaction, obviously, with Fannie and Freddie. We were coordinated on many things by the regulator FHFA. And there’s obviously communication between the different regulators, the FHA, and Ginnie Mae, and HUD, and there’s some policy coordination across those groups as well. And the banking regulators get involved in that conversation. In terms of the business community, there’s lots of conversations that are between various companies. In fact, one of the impacts of the coven has been the reduction in interpersonal communication between companies at conferences and things. It’s, as you know, it’s much more difficult to get all that the nuances of communication online. And so there is something that’s missing in that sense. There’s a lot of coordination of of economists on on issues. And most all the chief economists who are involved in housing, talk to one another frequently, whether it’s talking about research issues, or market conditions or things like that, there’s there’s a lot of core conversation on on issues in that space.

Sean O’Toole  15:34

Speaking of market conditions, I know that’s probably the thing that folks listening want to hear the most about, you know, can you walk us through a little bit, you know, what’s happened from March to today? And then kind of what you wake up on what happens over the next, you know, 12 months, two years? And, you know, what, some of the variables are there that, you know, could change that? Sure.

Doug Duncan  16:04

Um, well, so is it, it was the case, when I first was named chief economist and something I, at the Mortgage Bankers, I had to think about it for a little bit, because I had to get used to the idea of being wrong, because people are expecting a point forecast, and the best you can do is give them a range. So once I got comfortable with that, then you have to, you have to decide what things you think are important. And they change from time to time, because the different sectors, the economy, abin, flow, and all of that. So, I’m, in March, when COVID really had we changed our language a little bit. And we said, What are the drivers of this shock to the economy? The main one was a disease, which is not an economic phenomenon. It has economic impacts, but it’s not an economic variable, so your model will not have the disease in it. So we said, well, what effect does the disease have? Well, it affects people’s behavior, which affects businesses behavior, and businesses make choices. And then that affects policymaker behaviors, which constrain the behaviors of people and businesses, right. So there is that that’s the environment in which the the the economic momentum is going to be affected? And what’s what are the drivers, it’s the incidence, more morbidity, and duration of the disease, the severity and the incidence, severity, and duration of the disease, those are the things that are going to drive, what happens to economic activity, none of those, again, economic variables. So then, so what we said at the, at the April board of directors meeting Fannie mae, it was we said, Look, what you see now is our base scenario, because we’re really not talking about forecasting, because forecasting assumes a pre existing set of relationships between economic variables. But this is being driven by something outside that system. So really, what we’re doing is designing scenarios, which we hope to improve as time passes, and then eventually get back into the forecast space. So that was the first step. So then we ran some scenarios. And those are used in stress testing the company’s performance, because we needed to understand how that was likely to impact our company, and therefore what we do for the market. And surprise to the board, we came back and said house prices are going to rise. And they said, What?  And we said, well, we’re also as you know, since June of 2010, we’ve been serving 1,000 households a month. And we’ve found some really useful information in what people do. And right now, the people who have a home that they could offer for sale, are more pessimistic than the people who could be in a position to buy a home because of these very low-interest rates. So supply is going to drop faster than demand. And when the curves shift that way, price goes up. So activity will fall, that price will go up. And they said, Well, we’ll see. So now we’ve seen and that’s exactly what has happened. So the fact that rates fell, and then the Fed brought it down even further and now is buying $40 billion of mortgage backed securities a month. All of that has led to rock bottom historically low mortgage rates which met the demand of the of the Millennials, who are largely salaried workers. And most of the job loss has been an hourly wage-earning service workers who tend to be renters. So if you’re still employed, there was an initial phase in the April timeframe, what activity really dropped as everybody was waiting to see what’s going to happen to our job. Most of the job loss was in the hourly wage earner space because it was service sector discretionary spending by middle and higher-income households, which say simply curtailed. So those jobs only restaurants, theaters, concerts, sporting events, airplanes, hotels, that’s all discretionary spending by middle and above income households. But the workers there are hourly wage workers. So we said, when these salary workers get confident, they look at those low-interest rates. This is like a lifetime opportunity to buy a house and lock in a very low-interest rate. And that’s exactly what happened. So today’s numbers that came out in terms of new home sales past a million, that was a that was a full quarter ahead of what our forecast was, we have been trying to catch up to the pace of growth. And I, I told my staff this morning, I every so often, my nervous gene gets tweaked. And when my nervous gene gets tweaked, then we start digging into some data, which we’ve kind of been taking for granted. It’s been a couple years since we revisited the housing production numbers relative to the demographic profile of the population. So it’s time to take a look and see if they are aligned. Or if we’re going to be getting ahead of ourself. In terms of the supply, demand balance, if when people who own an existing home become more confident they can offer it for sale, and for whatever purposes, then that supply metric picks up. If we’re building like crazy at the same time, there could become some possible overbilled. I don’t think it’s there. But I want to be sure, and I’m a little nervous, because the monetary stimulus is so strong in this space, that it could build some imbalances and lead to trouble. I don’t like to say I don’t think we’re there. But I want to be, I want to be more confident of that statement.

Sean O’Toole  22:22

We’re gonna, I think there’s also on just that piece, and I think there’s more to get back to her on the economy, but on the supply-demand, right, the and maybe I’m a little California biased here. But most of the new supply coming on market isn’t you know, if you think about that, ABC, it’s really at that upper-middle class range. Versus, you know, anything close to affordable housing, so I could see an oversupply at the upper end. I think we’re at real risk of that. But, man, we are, it doesn’t feel like if all king’s hourses and all the king’s men on it, we could get to an oversupply of affordable housing anytime soon, at least out our direction.

Doug Duncan  23:13

I’m in agree with you agreement with you that’s it is difficult to build profitably low income-eligible housing. California is probably the poster child in that space. So I like to say it’s just my nervous gene. And I agree with you about the distribution of supply. One of the issues on that front, is you’ve seen savings rates in the in the economy have skyrocketed, they’re down a bit, they rose in the second quarter to something like 32% annualized where our norm is six to 8%. It’s still over 20%.

Sean O’Toole  23:56

And coffees add up.

Doug Duncan  24:00

Well, wife came in to me and she said, Have you looked at the checkbook lately? Where’d all that money come from?

Sean O’Toole  24:04

It’s more like where didn’t it go?

Doug Duncan  24:09

Right? Exactly. So that’s the benefit. That’s the counterbalance to me being home all the time. Um, but so I don’t think that the savings are evenly distributed. They’re more in because it was the discretionary spending of higher-income households that got curtailed, that’s where more of those savings are. So they’re active in the housing market repositioning themselves, which is why you see those numbers at the higher end of the home sales numbers where they are. That’s, that’s a piece of that and many of those will lock in the last mortgage they ever have.

Sean O’Toole  24:46

Moving along from housing, talk about the like larger economy, you know, jobs and you know, the health of small business and some of that I know you pay attention to those broader economic indicators to so just you know, from March to today kind of where do we stand big picture, you know, GDP, those things.

Doug Duncan  25:09

Well, the one data point I would love to have is real-time data on small business formation and failure. If I could ask for one data point, that’s the one I would want. There’s bits and pieces of it out there. But there is no consistent, reliable deep data set on that on that issue, because it’s key to understanding where employments gonna go, if there is capital to restart small businesses, and that picks up as the pandemic wanes. That’s great news. I don’t know if that’s going to be the case, because there’s a lot of losses that have been absorbed in the small business community. And then, so that’s the that’s the one thing I worry about, and that we think about

Sean O’Toole  26:03

On business radar is probably my next company.

Doug Duncan  26:06

Yeah, that would be that’d be awesome.

Sean O’Toole  26:08

I think about it all the time. And you know, I care so much about small business, and I think it’s so under appreciated by both parties. And I could go on and on. But I agree with you, I think it’s a one of the most important pieces of the economy and one of the least understood, so it was great to hear you say that.

Doug Duncan  26:27

Yeah, sign me up as a interested supporter, or, or investor or whatever, it’s a it’s a really important variable, so we are actually above the mean. In other words, we have toward the higher end, stronger recovery than the blue-chip consensus. And ours is, you’ll notice I didn’t use the word optimistic or pessimistic. The reason I didn’t use those words is that’s that suggests that you’re forecasting what you want to happen, not what you believe will happen. And my staff is always on task to check their emotions at the door. And when we’re forecasting, this is going to be what we believe will happen, we’ll get wrong in one way or another anyway. But at least it’s not just our attitude. That’s driving our forecasters. So why are we above consensus? Because of incoming data, it’s at its surprised to the upside, consistently. And I know you guys were in the room at least two to three years ago, when I said, and I’ve said this in many venues that because of a supply problem in housing, the shortage of supply relative to the level of demand, the next time we have a recession, housing could very well provide a cushion on the downside. You know, the three rules of forecasting, if you give a number, don’t give a date. If you give a date, don’t give a number. And if you get it right, don’t look surprised. So I’m leaning on the third one, that has turned out to be true that that supply is your has supported economic activity in this downturn, that’s been a really good thing. But it needs a lot of help around it, primarily jobs and income growth. So we see this year, at the end of the year, national income adjusted for inflation will be about 2.6%, lower than it was at the end of 2019. That’s that’s the magnitude of the downturn in our forecast. Then next year 2021, we see recapturing that plus maybe a little bit. But what that means is over a two year time period, at the beginning of which unemployment was three and a half percent, you essentially had no growth, which if the workforce grew, unemployment had to go up. And so unemployment will be about double where it was at the end of 2019, still by the end of 2021. So that’s a kind of a simple way of thinking about how the pieces fit together. It may it it’s hard to say whether it’ll be above or below that, going back to the Small Business question. If consumer attitudes about discretionary spend shifted different sectors, we may see higher unemployment, because it’s not clear that the skills of all those service sector workers are transferable into areas that the economy might turn, we don’t know. But that’s, that’s to me a risk that’s out there.

Sean O’Toole  29:37

You know, I feel that one I think that’s a risk, you know, bigger picture to just to to automation and the rest, right, like everybody wants, you know, you know, minimum wage to go up, but at what point does minimum wage reach a point where they replace the person with a kiosk? So..

Doug Duncan  29:56

Exactly, machines don’t get benefits right?

Aaron Norris  30:01

They don’t need breaks, and there’s no sass.

Doug Duncan  30:05

Yeah, it’s a it’s a challenge,

Sean O’Toole  30:07

You know, on the housing being a cushion. Um, there was an interesting article, and I wish I could attribute it. You may have read it or think was in the journal. And the person basically made the case that housing was a poor cushion, because it’s really consumption rather than savings, and that the dollars that are being redirected into housing and rate and increased house prices don’t really provide good long term economic benefit versus those same dollars being invested in, you know, new business and job creation and and other things. And that housing this, this bump in housing actually hurts our long term economic, you know, forecast. What are your thoughts on that?

Doug Duncan  31:00

Well, it is there clearly are consumption elements to housing, I think in in he’s right. There’s a bunch of people in the housing sector, that that are kind of evangelists, if you will, for housing, it’s obviously it’s important. And every developed country has policy related to housing, because it’s one of the basic needs of people, it’s a place to live. So from that perspective, it is consumption. It does create employment, because as population grows in it stimulates investment in related areas like construction. So it does have investment elements to it. And it also has some savings, but it element to it, but it is it’s a basically a 30-year fixed rate mortgages, a forced savings plan, right? You’re paying and as long as house prices don’t fall, which sometimes they do, which means that your savings rate isn’t what you think it is. It for many people that equity is at the end of the they’re working period, is valuable to them as an investment. But so I’m partway in the in the camp with that person. And I’m not, I think good, we’ll have to have a place to live. Hopefully, we can have decent places for people to live. But it’s not the same kind of investment as starting a small business and employing people. And that kind of thing.

Aaron Norris  32:37

Is the research that I’ve seen on it. It always there’s a lot of arguments for homeownership and the data that they point to they go to the stock market over that same 30 year period. But that’s assuming that people are actually investing in it. Is there any consumer research that shows people who are renting are behaving in that way they’re taking the money and investing it? Because the data I’ve seen on homeownership, there’s a huge wealth gap and those that own than those that don’t, that would seem to squash that argument.

Doug Duncan  33:06

You are correct. Now there are people who rent and it’s a lifestyle choice. It’s not enforced economically, they could very easily buy and own homes, but simply don’t care to invest their money in that way. That’s a small share of renter households, but it is it exists. And you’re absolutely right about the data on renters. And that is why when we survey renters, the biggest hurdle to renters in their mind is a down payment. Even though there are loan programs which are as low as 3%. Down, it’s it is still the concern of I share of renter households that they don’t have, for example, 10% or even 5% that they can pay down and the Federal Reserve’s survey of consumer finances, which they do, and they had been doing it every other year, I think maybe now they might do it annually, is a data set that gives gives clear evidence of the wealth gap between renders and orders. But it’s also gets into their assets and their liquid liquidity of their assets as well. And there’s, you can see why they’re renting.

Aaron Norris  34:23

Has there ever been any conversation about sort of the section eight program? Is there ever talk of a hybrid program to where it’s almost like a lease option program where people in section eight would end up owning by the end if the government’s going to spend money on rent to an asset that they don’t own? I don’t know, has there ever been any discussion of that?

Doug Duncan  34:43

Um, I don’t know the answer to that. It’s an interesting question. I just by chance, I was reading a news article this morning, as I was starting work of one of the single-family rental investment companies who is offering A sale at least back option, which is a little bit along that.

Sean O’Toole  35:04

Oh yeah. sale?

Doug Duncan  35:06

Yeah. Yeah, I thought I thought that was interesting.

Aaron Norris  35:11

Manufactured homes are you guys starting to do a lot more research on manufactured homes?

Doug Duncan  35:16

Yes, that is an area, which is clearly affordable housing. And we have changed some underwriting rules there too, to attempt to support the growth in that space, because our view is, from a long term perspective, we’re probably producing less than half of the manufactured housing that we should be, just because it is such an affordable, affordable form of housing. Part of that might be the availability of land in proximity to where workers who would work in that capital live in that category of housing would have to go to get to work that and you know, land, obviously, the first thing you need, if you’re going to have a play building to live in is land to put it on. And its proximity to a good transportation lines that get people to and from work that are in the income category that typically would focus on affordable housing is a question that said, we have a clear set of guidance on the quality conditions of the manufactured housing and are anxious to provide funding in that space.

Aaron Norris  36:31

Interesting.

Sean O’Toole  36:31

Let’s break that… let’s break that down just a little bit, right? Because I think now manufactured housing means very different thing we’re seeing, you know, $4 million prefab homes here in Tahoe, that are manufactured housing being brought in on, you know, one house being brought in on 20 to 30 trailers, right and assembled into this really amazing thing, multimillion-dollar property. Right. So that’s manufactured housing. And then at the other end, you have like mobile homes, right? So..

Aaron Norris  37:00

That’s a dirty word.

Sean O’Toole  37:01

You own the land. And it’s, you know, double-wide, right, like, some are single-wide. So…

Doug Duncan  37:10

That’s a great point. It is, it’s one of the impacts of technology, that that you can now modularize a property and build in a factory, you can build component parts, which can then be erected and constructed and integrated on site. So you’re absolutely right about that. That is also affordable. One of the things that shocked me, maybe eight months ago, I shouldn’t say shocked, but I was a little surprised, was Toll Brothers, which we think of as a high-end builder is doing a significant amount of that kind of building today, because it’s cost-effective.

Sean O’Toole  37:45

Right? You put the you put the plants where the jobs are, and you put the houses where, you know, or where or where the labor is.

Doug Duncan  37:53

Mm hmm. Right.

Sean O’Toole  37:55

And aren’t, you put the plants there? And then you put the houses where, you know, there’s demand. And that seems to make a lot of, because usually in the places where you really need housing, there isn’t an available labor pool to build it.

Doug Duncan  38:10

Yeah, that’s often the case. Yeah,

Aaron Norris  38:13

The going to the builder association meetings in Las Vegas, this has been one of their top things that they keep talking about is the labor issue. A lot of people I guess just aren’t going through school anymore and thinking that hard labor and construction is fun. So maybe the manufacturing of homes. It’s definitely not what it used to be. So the modular the manufacturing, and especially here in California, around the accessory dwelling unit conversation, and the lack of labor out here in construction, it’s going to fill a really important need. To that point I heard that Fannie Mae was looking at, I know, one of the problems in the ADU space is that when you mix inventory, a bill with a manufactured home, some lenders don’t like to do that. Is that on your radar, something that you guys are exploring?

Doug Duncan  39:02

Um, you know, I don’t know the answer to that. It’s not not been in my come across my radar screen. But that’s an interesting question. I’d have to I’d have to ask some of the folks in our underwriting whether that’s an issue. Just…go ahead Sean.

Sean O’Toole  39:21

I just wanted to come back to affordable housing, a little bigger picture like you know, and the consumption savings, you know, concept we talked about a second ago. So, I mean, one of the things that has hurt affordability right is a lack of supply obviously pushes prices up. And, you know, in a lot of places where you have high prices, the owners there want to protect those high prices by not having more things built. Yep. And so becomes this kind of self-referential, you know, growing thing where, okay, we as prices go up more and more, you want less and less bill to protect your price gains. And so, you know, we talked about earlier this this idea that housing is consumption, it’s taking money away from savings, but as prices go up, are we also taking money away? And the opportunity away for new supply for maybe that dynamic? And if so, clearly has impacts for fans and others. So, to some degree is Fannie Mae, you know, known because they need to protect their investment, you know, and their mortgages, as prices go up. That’s it everybody kind of become aligned against affordable housing, despite wanting to talk about it.

Doug Duncan  40:50

Right. Well, from Fannie Mae’s perspective, we have an affordable housing mandate. In other words, we’re part of our charter mission is to make credit available for lower and moderate-income housing. So we have that counterbalance that’s actually part of our rationale. That what you’re talking about is exclusionary zoning. Really, that restricts development in different areas. And there’s no question that that is a factor. And it’s part of the reason you see on many of the developments have a covenant that has restrictions on things that can be done within that development. And it’s designed in part to protect valuation of properties, whether they’re the existing valuation or rising valuations, to your point, if supply lags behind demand. There’s an interesting experiment taking place in Minneapolis, which a couple of years ago rezoned everything for in their metro area for more development. And but then they didn’t do it by neighborhood, because they wanted to see how the market would reallocate supply, which I think that’s going to be a very valuable experiment. Probably some of the people in Minneapolis might not like they like to hear that depending on where they are in the Property Valuation space. But it is from a societal perspective. That is, that will be interesting to see. But you’re absolutely right, that there is there’s a natural incentive. And there’s a try to, there’s an academic who’s written a couple of books on that issue. And he’s sort of the reigning expert in talks about exactly that issue.

Sean O’Toole  42:45

The State of California is starting to take away local development control, as well, like with ad use, and other things, basically, to try to force you know, just stop communities from coming back and saying, No, no, we’re gonna not let you build anymore. Right. So I think this is going to be one of the most fascinating things to see how that rolls out. Because, you know, wealth gap division. And you know, to your point earlier about salaried versus hourly workers and the rest. I mean, it feels like it’s, it’s accelerating more in the last six months, then I can remember, you know, the data around that, or, you know, you guys watch that wealth gap, and some of those things we do.

Doug Duncan  43:29

I don’t have anything top of mind specific numbers to give you But yeah, absolutely. Because it’s, it’s essential to our business, right? We need to, you know, when we underwrite a loan, it matters to us what your wealth and income and credit characteristics are. So, we absolutely care about that. I don’t have looked at something on that in the recent days, and keeps it in my memory, but…

Sean O’Toole  43:53

Have you guys ever talked about doing lending, based on the income of the community, rather than you know, that there’s these limits that are kind of, you know, conventional loan limits, right, that are out there that try to kind of keep a cap on how crazy things can get on, you know, the GSEs, but then saying, hey, this person can afford this right, rather than Why not say, you know, for this home for this asset, the people in this community, right, can afford this much, and we’re not going to lend above that. And that seems like that’d be a way to keep prices from getting out of control versus the incomes. In that that thing because one of the problems once you have three homes that sold supposedly every home’s worth that even though nobody in that place could afford it.

Doug Duncan  44:47

Right. Well, we do have a maximum limits on loans that are established by our regulator annually, the maximum amount that we can lend against, so That. And that’s been a source of discussion for as long as I’ve been in the mortgage industry about how those should all those limits should be said, At present, they’re set annually by FHFA. They in the fall of each year, in fact, it’s probably upcoming. I don’t remember the exact date, they announced whether that limit will be held constant raised. They’ve never lowered it, at least since I’ve been in the business. But and it does, there are some variations geographically, I think Hawaii and Alaska have exemptions, Puerto Rico, some things like that. And then one, two, three, and four unit properties have different ceilings. But we in terms of community incomes, we do track that, because it is an input into understanding house price. And so we actually forecast house price in about 110 in 100, metro areas, and then 10 regional areas, and income is one of the variables that goes into that model. So that price would feedback against those limits that you’re talking about to give us an idea of what business volumes might be in that market.

Aaron Norris  46:23

Are you worried at all about taxation policies at the state and local levels as we deal with COVID? So I, you know, watching California, Nevada, you know, states that were very much reliant on these jobs that have disappeared, really high unemployment rates, they’re looking at ways to raise money, because they can’t turn on the cash printing machine, like the Fed can. Does that worry you at all for specific states? Like California? Will we see a migration out? Will that affect pricing? How concerned are you?

Sean O’Toole  46:53

Isn’t really every state, though? I mean, every state has had pretty serious to make up income. So somewhere, and because they have to ultimately have balanced budgets, right, like, we’re gonna see a lot more state and local taxes. Is that do you think? I mean, that’s kind of what I’m thinking?

Doug Duncan  47:09

Well, there’s, you’re right, I think 49 out of the 50 states have some form of balanced budget requirement. In some cases, it might be across multiple years, as opposed to within every single year, but you certainly will see cost-cutting, and you’ve seen job loss at the state local level of employment, government employment. So you that’s for sure, but that there will also be an attempt to raise revenues as well. There’s been of those who are involved in the municipal securities, bond market, there’s been a lot of discussion about the need, for a part of the stimulus funding at the federal level be to support state and local jurisdictions, of course, that gets caught up in the discussions of whether or not they’ve managed their pension obligations properly, or becomes a political football from that perspective. But, yes, there… We don’t yet have detailed research on which jurisdictions services relative to housing might have an impact on valuation. So that’s a that’s a researchable topic. That’s an interesting question.

Aaron Norris  48:30

I feel like we’re getting a whole bunch of data ideas. I’m sorry.

Doug Duncan  48:33

Yeah, that’s the end of the show.

Sean O’Toole  48:36

INcome taxes are, you know, income, which a lot of states don’t have income taxes, you know, sales taxes, and of course, property taxes, right. And so I kind of see an assault on all three, being likely nationally as we deal with drop in revenue. I mean, COVID, because of the way it hit restaurants and hotels, and all these things that are such strong, you know, tax components for these, you know, City, County, state governments. That feels to me like that’s a that’s still a pretty big headwind that’s in front of us.

Doug Duncan  49:17

Yeah, I would agree with that. The I think there are five states that have no state income tax. Florida, Texas, Tennessee, Nevada, and Washington, I think. The five states that have no state income tax. So they’re, we’re hearing I’m living in Florida, so we’re clearly hearing about cutbacks on state expenditures. I’ve not seen except at the local level, there is going to be some increase in property taxes at our local level.

Sean O’Toole  49:49

You know, we’ve even heard in Nevada that they’re starting starting to be talking of a constitutional amendment to bring in a state tax.

Doug Duncan  49:58

Wow.

Sean O’Toole  49:58

  1. So you know, That’s one thing that I think’s a headwind that’s still ahead of us what other things are still headwinds that are ahead of us that need to that every one of us should be paying attention to looking for data on watching for?

Doug Duncan  50:14

Well, obviously, the number one thing as a small business was surgeons whether or not we’ll see that. Second thing is that whether there is an effective, broad-based vaccine developed. So, because that, that eliminates fear, which is the primary driver of this downturn, if, if you could say tomorrow to everyone who used to go to restaurants, no problem, you have this shot in two days after you have this shot, you can go and even if somebody with COVID, shares your spoon, you’re not gonna get sick, that completely changes the dynamic. And we’ve learned a bunch of things that might not go back the way they weren’t, we’ve learned we can work remotely, in many instances, at least part-time. And so that that will maybe permanently change some things in the commercial real estate market, for example. For those who are wondering what we were gonna do with all these suburban houses that have five bedrooms, because people are having smaller numbers of children, well, if to make turn into office, you may only need three bedrooms, and two of them become offices. And that’s a great house for you. So, you know, there’s a bunch of things like that, that that we don’t know, my problem with the vaccine story is my understanding is, and I absolutely am not an expert in this, but I’ve tried to read up and see, the last, or the earliest, a broad-based, long-term successful vaccine was developed was the mumps and it took four years. Now we don’t have a vaccine for SARS, we don’t have a vaccine for MERS, we don’t have a vaccine for AIDS, we don’t have a vaccine for Zika. These are all viral things that are common cold, we don’t have a vaccine for the common cold. We have some vaccines for flu that are effective, partially effective for a year or a season. I’m inclined to think it’s more likely that that’s what we’ll get. And unfortunately, the surveys of people suggest something like 40% of people wouldn’t take the vaccine even if it was available, which is a little disturbing. But that’s to me, that’s the number one thing that is on most people’s minds, and for the right reasons, is what happens with vaccines. That, barring that, then the question is how do people respond if infections pick up again, and there’s some evidence that started but maybe it’s driven by the need to get back to school, and some things like that, which is also a very real need. And so how the response is, if there is a sustained pickup in infections will have an impact on whether BB our forecast is right, it assumes a kind of a flat behavior in that in that space or based scenario. And we’re not surprised to see a little pick up because of the school question. But that’s another variable that we’re watching.

Sean O’Toole  53:28

And bigger picture, I mean, we’re we’re the Fed’s balance sheet is expanding dramatically. Deficit spending monetizing around debt, all of those things are have changed radically. Are there headwinds that come from those, you know, fundamentally come from from that? Or can we just print ad nauseum? At this point? It doesn’t matter.

Doug Duncan  53:52

Well, that, there’s a discussion about whether the Fed should be trying to control the yield curve, for example? Well, they are as on whether they should they are right, how they decide to acquire treasuries absolutely as effect on the shape of the yield curve, and they’re adding $80 billion of treasury bonds. So I think that most economists believe that the expansion the endless expansion of the deficit and, and the debt. And today, we’re pretty close to where we were at the end of World War Two in terms of debt-to-GDP ratio, which is awfully hard to, to contemplate, but is that’s where we are. Most economists believe that at some point that’s going to lead to inflationary pressures. There’s no evidence of it today, which has led to one strain of economic saying, well, the modern monetary theory group that suggests: Well, it’s kind of an endless game, the Fed can just monetize it, and what’s the problem? Most of economists do not believe that’s an accurate reading of the of the end game. There’s only three ways to fix a deficit, it’s you can reduce spending, you can increase growth so that nominal growth is faster than the growth of nominal debt, or some combination of the two. And right now, there’s really no appetite for any of those in Washington, but the one that’s going to get the most discussion is taxes. And, you know, I think it was, I forget one of the present, maybe Reagan That said, if you want more of something subsidizing. If you want less of something, tax it. Then yeah, that third line on there, which I can’t remember, which is, of course, the main reason I’m not president, but

Sean O’Toole  55:53

You know, the, you know, under modern, modern monetary theory, right, it says you don’t raise taxes until you see inflation. And you just go ahead and print. And then when inflation becomes a problem, then you start taxing and I mean, at this point, we’re, we’re so close to the MMT experiment, like, maybe just go for it.

Doug Duncan  56:14

Yeah, it’s well, and the Fed is said, now they’re your fate is in their hand, right? flexible, average inflation targeting: FIT. So your fate is in their hand. They haven’t said over what time period, they’re going to calculate the average, then and said how far inflation might go in the short run. Before they would respond. Even if on average over whatever time period they’re thinking about. It hasn’t met that target. They’ve given no forward guidance on the growth of their portfolio. So there’s all kinds of uncertainties even though they’ve announced a new policy, there’s all kinds of uncertainties around that policy. And to your point, we’re essentially in some form exercising modern monetary theory anyway, and do curve control same time.

Aaron Norris  57:09

We only have a few minutes left, I have to ask the question. How long do you think 30-year mortgage rates will probably end up in the next couple years?

Doug Duncan  57:18

Well, we are forecasts for 2021, is that they averaged two and three quarters percent, which means some people were getting mortgage rates lower than that two and a half, five. I think right now, people are getting mortgage rates at two and seven eighths and maybe even two and three quarters today for very high quality credits. So that would suggest that the, what’s going on is when the COVID hit, spreads blew out, for several reasons that in 2019, the spread between the 10-year Treasury and the 30-year rate were 100 was 180 basis points on average. That blew out to over 260 basis points in the April timeframe. So an 80 point widing that has come back in to somewhere around 220 or 225. The last time I looked, which if 2019 is a reasonable approximation, there’s still 40 basis points to go. So if the average today is three that would suggest and could even get as low as 2.64, for the average. We don’t think it’ll get quite there, but not far. If it gets there. I’m not going to be surprised. But I remember sitting at my desk in June of 2003, I was at the Mortgage Bankers Association. And I was watching the 10 year yield pass on the television screen, which showed the market indices and he had 3.08 on the 10-year Treasury and intraday trading intraday trading. And I thought to myself, will I ever see a 10-year Treasury rate lower than 3.08%? And today, it’s what 0.7 I think, or something like that.

Aaron Norris  59:10

Wow, crazy.

Sean O’Toole  59:11

Crazy. And it seems to be lower with each crisis. Right? And so going to the latest one, but there will be another. And whether it’s, you know, this one was, what 12 years, whether it’s two years or 12 years or 20 years. You know, do we end up with Japan-like rates in the 1.5 after the next one?

Doug Duncan  59:31

Well, that’s the the the question to the Fed in which they have said, they have not said no, but they have said we don’t want to go to negative rates. But that’s the next. That’s the next phase. Right? What they’ve been trying everything but that because there’s no solid evidence that negative rates actually work. there’s pros and cons to it, but in terms of the net effect is not seen as positive which is why the Fed is where they are. Part of the problem is that the Fed is trying to do the work of fiscal policy. Because the fiscal policy mechanism isn’t working. The problem there is that you distort price signals by attempting things which are out of the severe out of the sphere of technical management by the by monetary policy. So you get, you actually get a negative in the confusion of market participants over what the real price signals are. And we’ve always believed, and I still believe that price is an indicator, an important indicator of things, what happened in the 2007 and 2009 time period, for example, this is go back to this because it’s the day and one day of my life that I will never forget, sitting at my desk, second week of August, in 2007, I got a call from the vice chairman of the Federal Reserve. And he said, What do you think we should do? And I checked, even today, the hair stands up on my arms. But when I remember that, because it was such a frightening call. And I said to him, Governor, it was done coal. And I said, you know, that? Scared because if you’re calling me, I’m not at the top of the power pole. And it’s got to be a lot worse than I thought. So I said, I don’t know. But I do know this, that if you’re going to, if you have a price to value something, you need a price to value something. And in order to get a price, there have to be both willing buyers and willing sellers. And today there are only willing sellers. So I think you have to be a buyer. That was August of 2007. In October of 2008, they became a buyer, right? So to me, that’s the it was a simple thing.

Sean O’Toole  1:02:09

It does what we put in this time they’re buying.

Doug Duncan  1:02:11

It’s Yeah, it’s what we believe about the value of price, right? The problem is willing buyers and sellers. The Fed is a policy buyer. They’re not an economic buyer, they’re not buying for returns, they’re buying to effect a policy. So, if you’re buying for returns now you don’t know what element of that price is a policy determine price versus a real value price. That’s, that’s my problem with it.

Sean O’Toole  1:02:41

We’re almost out of time. One more really important question. We’ve been saying we’re not going to see the same wave of foreclosures, even if unemployment and we have huge mortgage delinquencies. Even if all of that comes to pass, we’re not going to see the same wave of foreclosures because Fannie Freddie, the Fed, learned a lesson in 2008 and isn’t going to dump you know, as many homes they’ll they’ll hold them, they’ll work with homeowners, delete the homeowner in the home not paying is my personal opinion over having too many foreclosures. But I also think there will be some foreclosures because you got to keep some fear that people could lose their home to foreclosure otherwise, everybody stops paying. Is that am I giving people good advice?

Doug Duncan  1:03:28

That I think you’re on point. They it’s not just those elements. But there’s also now a group of institutional investors who buy distressed properties to turn them into single-family rentals. So you have that additional cushion on the downside that didn’t exist previously. And I’ve gotten calls from them asking, what’s your price forecast? What do you think about a lot? So they’re there they have capital? So I..

Sean O’Toole  1:03:56

I think I got a bunch, because they used us to, you know, find the foreclosures right. And so I’ve had multiple calls saying, Hey, we’re raising $100 million dollar fund a half-billion dollar fund, we are all in? Is your software still there to support us? And I might get more there, but I don’t know that you’re gonna get to spend it.

Doug Duncan  1:04:16

Right. Exactly. Yeah.

Aaron Norris  1:04:19

Well, I really appreciate your time. Oh, how would you, how should people find out more about the work that your team is doing? Where should they go?

Doug Duncan  1:04:27

We have a section on the Fannie Mae website, FannieMae.com and look at look for research and our forecasts are there the surveys, a consumer surveys of lenders, a bunch of the various research studies that we do are posted up there and there’s no paywall or anything.

Aaron Norris  1:04:44

I guess I’ll get…..

Sean O’Toole  1:04:46

One of my, yeah, you’re definitely my favorite economist on all this stuff. He just takes such a data-driven approach and, you know, doesn’t ever feel like you have an agenda that you’re trying to, to push underlying you know, under You know, we always joke that so many economists or maybe that’s not an appropriate joke, but that they’re paid to play. How about that?

Doug Duncan  1:05:11

They can say nobody has ever bought my voice. So we try very hard to take a, a search of truth approach to the things that we put out, even if it’s bad news for us.

Sean O’Toole  1:05:26

Yeah, that’s really, really appreciate about you that about you. And really thank you for coming on today.

Doug Duncan  1:05:32

Our pleasure. Great seeing you guys. I look forward to us getting together in person again.

Aaron Norris  1:05:36

I’m good. All right, bye Doug. Thank you for listening to the Data Driven Real Estate Podcast, you can find show notes and links to some of the resources mentioned in the show at data drivenrealestate.com. Click that join the community. And you’ll be forwarded to the property radar community where you can ask questions about the current show and even see upcoming guests and ask questions there. We’d love to engage with you in the community. So check it out. Please don’t forget to like favorite, subscribe and share on your favorite platform where you’re listening to the show. It helps us out a great deal. Thanks for listening, and we’ll see you next week.

Written by:
Aaron Norris
Written on:
October 1, 2020