This piece originally appeared in the March 2024 edition of MortgagePoint magazine, online now.
We are well into 2024, and the housing market remains the same rollercoaster ride to start the new year as it was when 2023 concluded.
In order to get a grip on what lies ahead in the housing finance space, MortgagePoint recently had the opportunity to chat with two of the industry’s top forecasters, Fannie Mae’s SVP and Chief Economist Douglas G. Duncan, and VP and Deputy Chief Economist Mark Palim.
Note that this interview was conducted just hours prior to the Federal Reserve’s January FOMC Meeting where rates were held steady.
As SVP and Chief Economist at Fannie Mae, Duncan is responsible for forecasts and analyses of the economy and the housing and mortgage markets. He also oversees strategic research regarding the potential impact of external factors on the housing industry. 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. Prior to joining Fannie Mae, Duncan was SVP and Chief Economist at the Mortgage Bankers Association (MBA). His experience also includes work on the Financial Institutions Project at the U.S. Department of Agriculture, and service as a LEGIS Fellow and staff member with the Committee on Banking, Finance, and Urban Affairs for Congressman Bill McCollum in the U.S. House of Representatives. Previously, Duncan was a Board member of the National Association of Business Economics (NABE) and a Board Member and Chair of Strategies to Elevate People (STEP).
In his role as Fannie Mae’s VP and Deputy Chief Economist, Palim focuses on the impact of trends in the financial services sector on the economy and on the government-sponsored enterprise (GSE). Prior to joining Fannie Mae in 2009, Palim worked as a Senior Associate, Manager, and Director for PricewaterhouseCoopers, and served as Principal at LECG. He has been a consulting and testifying expert in antitrust cases and disputes in the financial services industry. Palim was first involved with economic forecasting and mortgage securities in 1988, when he was a Portfolio Manager and also reported to the Chief Economist at Mercantile Safe Deposit and Trust Company. Subsequently, he continued his work on macroeconomic and policy issues as a staff economist for the National Association of Federal Credit Unions (NAFCU).
EDITOR’S NOTE: This Q&A took place Wednesday, January 31, 2024, and reflects the views of Doug Duncan and Mark Palim as of that date.
Q: What are the top factors you believe will define the housing market in 2024?
Douglas G. Duncan: We don’t expect the Federal Reserve to announce a rate change today. They will signal some things on what’s an ample level of portfolio for them to provide liquidity going forward. They may provide some indication of what they think the direction of growth will be, and how that may impact the way that they consider future rates. If we have a slow growth forecast on the economy for 2024, we think the fed will likely cut rates four times this year, starting in May, and that would bring interest rates down.
When they have said in the past, “higher for longer,” one of the aspects of that we have thought about is that it can also mean the pace at which they lower rates, and the degree to which they lower rates may be easing cycles. It really depends on how the economy performs going forward.
Housing will obviously be impacted by the growth of the economy, and our forecast is that that housing will slow. The employment cost index recently came out, and compensation is indeed slowing. It’s one of the demand side factors for housing. It’s also something the Fed is watching carefully, as they calibrate monetary policy. So, that would be something.
Q: What do you anticipate on the rates front for the remainder of 2024? What could change your forecast on rates this year?
Mark Palim: Fannie Mae has mortgage rates by the fourth quarter of this year going down to 5.8%. Then, by Q4 of 2025, we have rates forecast at 5.5% … that’s our base forecast.
Duncan: If the Fed perceives that they have not accomplished their work on inflation, or if there is a reversal in the path of inflation, that would certainly impact the Fed’s path to monetary policy. They have not ruled out any further hikes. I think the Fed has conditioned the market to suggest it is really dependent on whether there was any resurgence in inflation. So the market is expecting to see a discussion of rate cuts in the future if not hikes, but they’ll reserve that option.
There is also a lot of geopolitical risk out there. We are not forecasters of international relations, but we do see risks to economic activity through the shipping space, for example, and that’s been well-documented, some of the attacks on shipping, which is going to impact risks related to the global supply chain. Rerouting tankers all the way around South Africa is expensive and could conceivably show up in some inflation measures. These geopolitical risks are somewhat elevated in our view today. So things could happen in that arena that might alter the path of activity.
Palim: Starting in April of 2022, we had a recession in our forecast because of the speed of the tightening that was happening by the Fed. We’ve taken that out, but we still think we now have subpar growth of 1% this year, and growth of 1.5% in 2025 or around there. There is a downside risk that for whatever reason, the economy may further weaken. That would likely drive down mortgage rates below what our forecast has.
Q: Are there any factors that may break the stalemate of people not selling their homes? Would you attribute the number of people staying in place at the moment to the high rate environment?
Palim: We asked people in a survey last year, “Are you planning to stay in your home longer than you expected or move sooner or about what you expected?” We found that the share of those who planned to live in their house longer was very close for those with and without a mortgage. So, that was a first clue that non-mortgage factors may be important, not just rate lock-ins as to why people are not listing their homes for sale.
We found that for those with a mortgage, 20% of those polled revealed that the top reason they are staying in their house longer is the rate on their mortgage. That was quickly followed by non-financial reasons, like where they live, they liked their home, and other reasons.
As rates come down, will we see an increase in supply? If the lock-in was 80% of the reason people were not listing their homes, it might lead to more supply. And we just don’t think that’s the case. We think that we pulled forward a bunch of sales when sales in 2021 and 2022 spiked dramatically. That, in part, was due to people who might be moving over the next few years and pull that move forward.
Duncan: I have watched some of the storylines talking about a market that is frozen or logjammed. I don’t find those as compelling metaphors because there were still nearly 3.8 million sales at an annualized rate. There is a lot of activity out there, it’s just not nearly at the level that it was previously.
What people are really calling for is more supply to improve affordability as interest rates come down, and a related pickup and activity which lies on the back of the builders.
Palim: Those who follow the National Housing Survey (NHS) have seen that affordability has been a key issue in that survey and the responses people give … we did see a jump up in those. In the latest NHS reading, we expect to see a decline in mortgage rates, which is both helpful and positive in housing activity. However, affordability challenges loom large over people’s willingness to move or buy a home as first-time home buyer.
Duncan: Equity accumulation has been substantial of late. And whether they have a mortgage or not, in either case, they’ve accumulated substantial equity. If they do have a mortgage that was taken out in the 2020-2022 timeframe, it’s at a lifetime low.
If you are in that category, this is a fairly good time. If you are on the outside of ownership trying to get in, that is where the issue of affordability can be really daunting.
Palim: Affordability impacts move up buyers as well because they look around and say, “Wherever I move to is pretty darn expensive. I’m not seeing a lot of bargains out there, so why should I move?”
Q: Back to affordable housing and entry-level buyers, what factors do you think need to change in the market in order to attract more first-timers? Would it be an increase in supply, an increase in affordable housing, or just overall economic factors that are keeping them on the sidelines?
Duncan: There are three critical variables. One is income. Incomes have to grow. The second variable is interest rates … interest rates need to come down. The third is home prices, and there needs to be some easing on the price of homes in the United States.
The house price piece relies on supply. So as a derived factor, it’s really the supply. And I know people are bored of writing the supply story, but it’s THE story. It has been on the back of the builders for a while. And of course, builders don’t build houses unless they can sell them because that’s where they make money. So again, the interest rate component and the income component will help determine whether someone can afford to buy a new home being built that meets the profit criteria of a builder. So, affordability impacts the builder as well.
Palim: The other factor I would like add is that news has not been all negative for first-time home buyers. The homeownership rate may have dropped off a little bit, but if you look back over the last few years, the overall homeownership rate has risen to around 65%, which if you look over the last few decades, it’s not a shabby place to be.
Q: Just to piggyback on that topic a bit, with most of these first-time buyers as converted renters, do you see any fluctuation in the rental market, or will the rental rate nationwide remain high?
Palim: There is sort of an extra dimension to that. While multifamily rent growth may have slowed last year, and probably went slightly negative in the fourth quarter, single-family rent growth remained positive. We do think that with a significant number of new multifamily units coming online, it may have a dampening effect on rents for at least another year.
But, you can have more first-time buyers and still have good occupancy and rent increases, as long as you have strong wage growth because then you have household formation. It does not need to be a zero-sum game between multifamily economics and a healthy first-time home buyer market.
Duncan: The basic underlying demographics are strong as well. The millennials still have a ways to run, both on rents and on owned homes. I think the average age of a first-time home buyer has gone up a bit due to the affordability issue … I think it is around 36-years of age. But you still have almost a decade of strong demographics behind the current path.
Q: Do you see an impact on migration patterns or where people are moving based upon weather events nationwide? Are people’s migration decisions becoming more heavily swayed by climate change?
Duncan: That question involves two factors: climate change is one, and affordability is the other. Fifteen years ago, if you went to Boise, Idaho, and had a lot of land available to build a house that you wanted at a fairly low cost, which is simply not the case today. Many people who had equity in California, and wanted to go to a friendlier business environment, may have made the move to Boise, and now Boise is huge. The same story applies to areas in Texas, Florida, and Tennessee where you saw an economic migration.
Palim: The way I think of it at least, is that in the short run, in order to pay your mortgage or your rent, you need a job. So people move to where the job growth is. If you look at migration, people go to where the job growth is.
Over the past decade, this has meant that there has been more movement into areas that are prone to flooding, and prone to fire and wildfire. Over time, you will have to see what happens to the location of jobs and the relative cost of living in those areas.
Does that all balance over time change to where you begin to see jobs migrating away? That is a possibility as well. We don’t know yet, but in the short run, the pattern has been people move to where the employment centers are, and where jobs are growing.
Q: Would you attribute part of these migration moves to pandemic-related reasons, work from home opportunities, and things of that nature?
Palim: Part of that is the issue, but the other thing is the simple cost of doing business, taxes, the cost of housing, and basic competitiveness across different metros and states.
Q: Any final comments on the state of housing in 2024 and beyond?
Duncan: Our theme for this year is “Housing seeks balance amid economic uncertainty.” Some of the things we have been talking about are not in alignment with the traditional rules of thumb that people think of in the real estate space.
We specifically did not use the word “normal,” because we don’t think in the post-pandemic period, it’s certain exactly what “normal” is going to be.
