Bruce Norris is joined this week by Doug Duncan. Doug is the Chief Economist at Fannie Mae. He is responsible for managing Fannie Mae’s Strategy Division and Economics & Mortgage Market Analysis Groups. In this leadership role, Duncan provides all economic, housing, and mortgage market forecasts and analyses, and serves as company’s thought leader and spokesperson on economic and mortgage market issues. See full video and resources
- Are we in a recession?
- Unemployment and housing
- Is the stress on the rental market or owner market?
- PPP programs
- Resurgence vs geographical shift
- Public assistance vs the dignity of work
Bruce Norris: I thank you for joining us. My name is Bruce Norris. And today we have a very special guest, Doug Duncan. Doug is the senior vice president and chief economist at Fannie Mae, where he is responsible for forecasts and analysis of the economy and the housing mortgage markets.
Bruce Norris: Doug also oversees strategic research regarding the potential impact of external factors on the housing industry. There’s been none of those, so that’s not been a problem. He leads. He leads the House Price Forecasts, working group reporting to the financial committee. Under his leadership, Fannie Mae’s Economic and Strategic Research Group won the NABE Outlook Award, presented annually for the most accurate GDP and Treasury note yield forecast in 2015 and 2016.
Bruce Norris: The first recipient and the awards history to capture the honor two years in a row. The list goes on and on. One of the most 50 powerful people in real estate, that’s a fact. Doug, welcome back to our show.
Doug Duncan: Hey, glad to join you. It’s good to spend time with you.
Bruce Norris: You know, it’s I guess one thing I’m going to ask up front, because it’s been an interesting discussion for California people that have renter or renters in place. There’s all kinds of talks about moratorium of rent paying. And so I wanted to first ask, what’s been the impact of the corona virus on delinquencies in Fannie Mae’s, you know, pool? And I’m just curious how that compares to, say, two thousand and nine or 10 when it was really at its worst.
Doug Duncan: Talking about in the rental space or.
Bruce Norris: Oh, no wonder the owner occupant, you know, in the owner occupant world, just delinquencies in general.
Doug Duncan: Well, at this point, it really hasn’t been much because of the presence of the forbearance program and the entrance into forbearance programs. Actually, fairly straightforward, roughly. Well, you have to do is contact your servicer and say that I am suffering a financial hardship driven by the virus and you can be accepted into forbearance per room. The question. And it can take it can be up to a 12 month. It’s renewable, up to a 12 month timeframe. So we probably won’t know until any individual loan passes that twelve month time period whether or not it will ultimately go into delinquency and foreclosure. So there are a set of rules on how that’s reported on credit reports and and things like that. So it’s it’s TBD, frankly. What’s interesting is there was initial run up in forbearance requests and then things leveled off. And there were actually some households that brought their loan current and got rid of the forbearance. Our assessment on that was that there were some households that simply acted because it was simple. They acted on as a sort of an insurance in the event that they suffered job loss or some serious income truncation. And when that didn’t happen, they reversed out of it because, of course, it does ultimately need to be broad current, whether it’s through some sort of modification or simply they paid the borrower pays back the amount they would have paid over that time period. So there is there are rules around all of that. But at this point, that’s not driving delinquencies because they are being they’re not being counted the same way.
Bruce Norris: What percentage of the loans that you have are in forbearance then? Maybe that was a better question.
Doug Duncan: You know, on off the top of my head, I’m not sure within of full market. Look at what that number is. But I should be happy to get that back. It’s not it’s lower than what I think. Some of the initial estimates were wildly high, 15, 20 percent. They depended on the source that you looked at. But it’s not nearly that, I think at this point. It’s like actually the MBA. I think the MBA puts out some some numbers for the full market as opposed to just the GSE’s is less that it is less than what was anticipated.
Bruce Norris: Yeah, I think I was eight or nine last time I saw it, but anyway. OK. Here’s an interesting question. In 2020. Have we met the technical definition of being in a recession?
Doug Duncan: We have the National Bureau of Economic Research, which is the governing body, which determines the start and end of recessions, pronounced that February was the starting month of a recession. And so they have not obviously they have not pronounced a an end to it yet, but we are technically in a recession.
Bruce Norris: OK, what are the key numbers that let you know you’re in a depression?
Doug Duncan: OK, then the humors thing that people used to say was, if your neighbor loses our job, it’s a recession. If you lose your job, it’s a depression. So the. But a more serious answer is if you were looking simply at unemployment. There there have been 42 or 43 million claims filed for unemployment insurance, which is the far and away the greatest number ever. Of course, the population is much larger than the early 90’s. Hundreds. So you’d have to adjust as a share of the population. But the initial impulse of job loss was very much like the Great Depression. The what? What’s interesting is the rebound has been fairly quick, but we’re still at under the official statistics at eleven percent, a little over 11 percent unemployment, which is which is a very serious level inside at the deepest level that the Great Depression in the 1930’s was. But the initial impulse. So that was there. The the forty two or forty three, five million filings for unemployment insurance is more than all that occurred during the Great Recession recently. And just to give you a little sense of magnitude prior to this to the virus issue, the largest weekly issuance of claims was something short of seven hundred thousand. Right. And in one week in March, there were six point nine million that were filed. Just to give you a sense of the magnitude of factor of almost 10 greater than the previous all time record, which is just incredible. Well, some of those unemployment insurance claims that you can’t equate that to forty two or forty three million jobs lost because the states in many instances were not prepared to process all those claims and never seen anything like that in terms of magnitude. So there is good evidence that some people filed multiple claims because they couldn’t get through the system. There were some people that filed claims inappropriately and had to refile. There were people who were not eligible under the rules that filed. So there’s there’s a number of reasons that that number doesn’t equate one to one to a job loss. But just the magnitude of it gives you a sense of the employment shock that that hit the economy.
Bruce Norris: Is what separates us kind of separating this experience from any other economic downturn, the speed in which it was delivered.
Doug Duncan: Unquestionably, it is. There’s there’s there are even in the Great Depression, there was a gradual decline to very high levels of unemployment, but this was a sudden shock hit. There is in that all the charts that you can that you could use to chart the actual data looked incredibly strange because both the magnitude and the suddenness of it. There are no previous examples of, for example, one of the ones I used to get a sense of it is that data I was just describing on the unemployment insurance claims. If you take the whole history of it in order to get the scale to include the the shock. Now, all prior previous weeks looked just like a straight line horizontally. And then you see this straight vertical line. And that’s the actual data is just shocking.
Bruce Norris: Yeah, I think I put that in Texas, somebody and I said, that’s the scariest chart I’ve ever seen.
Doug Duncan: Yeah.
Bruce Norris: It’s kind of funny when you’re talking about charts and say you’re in uncharted territory. That’s no joke.
Doug Duncan: Let’s chart it in a way people wouldn’t believe. No, just it’s amazing.
Bruce Norris: So we’ve had Coronavirus round number one and got some really aggressive government response, aggressive Fed response. What, in your opinion, did they get right in anything they did that you’re concerned about?
Doug Duncan: Well, the the suddenness of the of the job loss and the magnitude of the job loss did require some response because it would, in the absence of some support for that huge number of job loss, it would hit consumption dramatically. And you could start a downward spiral. So the I think the the PPP, which was intended to keep people employed, aligned with the Small Business Associations administration’s efforts to provide credit lines, to keep small businesses alive and add in the supplemental unemployment insurance to give some support to consumption where we’re really important. Now, you can argue over the degree or the dollar figures, those kind of things, because there’s pretty good evidence that the six hundred a week and supplemental unemployment insurance payments actually increased the income over what people some people had been making previously and as discourage them from going back to work. That’s that is not a positive thing. There’s all kinds of evidence that that in public assistance, the best position for public assistance is at a level that does not discourage the working poor because there is dignity in work and and the health of households is greater in the in that environment than in being completely on public assistance. So to the extent that it crossed the line in that place, that’s probably if there is another round in place, there’ll be some re-calibration. The the there’ll be a bunch of noise about whether all the companies that got access to the two funding deserved access to that. This is one of the one of the things that happens when you have a blanket national policy. There’s all kinds of regional differences in things. And there will always be stories of about about those regional differences and inequities and things like that. That’s age old kinds of things. The Fed entered to make sure there wasn’t serious instability, dislocations that that moved in the direction that we saw in 2007 to 2009 time period, that making sure that that the
payment systems remains functional is very important. The the the magnitude of the different types of involvement is going to get some scrutiny. The bond buying activities by the Fed that is buying corporate bonds will be seen by some parties as picking winners over losers. That’s going to get some scrutiny. The question of how do you actually unwind this expansion, given that in the past attempts to reduce the Fed’s portfolio after the 2007 2009 time period caused some liquidity issues. And then the general issue of how risk gets priced, where there are interventions in market functions that that distort risk return relationships is, I think, also something that’s going to get discussed over time. And you could characterize it as though the Fed has added to their to their list of responsibilities, which by law are minimizing unemployment. And I’m sorry, I’m minimizing unemployment and holding inflation down. Now they’re there acting on financial stability and some other thing. So I think there’ll be public debate about. Those things come. But as I said, any any broad based policy, like God has places you can you can criticize it.
Bruce Norris: All right. You know, I think the speed at which it happened, I think that was part of if it’s an overreaction, it might not seem like that on that day.
Doug Duncan: So, yeah, that’s true. Yeah. No, no one will question the fact that, Frank, in both the legislative process and the the central banking process acted with with great speed and impressively.
Bruce Norris: It was that, you know, in an era of pretty much no cooperation, they got something done that was pretty important. Yeah. So now the PPP program, PPP program has basically ended rougher this round. So what do you think is next for the unemployment rate?
Doug Duncan: Well, to go back to the unemployment insurance claims discussion last week. And that comes out every Thursday morning at eight thirty last week, the I’m sorry, the last two weeks it’s been at about a million and a half new claims file. As I pointed out earlier, prior to the COVID, that the highest week ever had been about seven hundred thousand little less than seven hundred thousand. So we’re more than double that. Still, that suggests that there’s still stress, significant stress in the employment market. So while we went down from thirteen point three to eleven point one in the most recent month, in terms of the unemployment rate, it’s the unemployment insurance claims suggests from here it might be gradual. The pace at which did declines. Our forecast for the end of year unemployment rate is about 9.3, really. So that only about two full percentage points lower than we are now.
Bruce Norris: Do you consider, especially in this latest cycle that we’ve got what we’ve experienced, do you consider U6 employment chart more important than U3?
Doug Duncan: It just describes a different thing. I don’t know that one is more important than the other.
Doug Duncan: They they describe different issues and give you a different sense of the dynamics of what’s going on in the employment category.
Doug Duncan: One of the things that I watch is the the number of people who are working part time for economic reasons. Right. Well, because that suggests there they would like to be working more. But they can’t. And those numbers are still very high and not surprising. And with an unemployment insurance strike, an unemployment rate of eleven point one percent, not surprising, maybe a lot of people working part time that would rather work full time that that both that the U6 most of the the various components, the employment to population ratio, the workforce participation rate, all of those things we try to aggregate, at least in our thinking, to give us a sense of momentum and also of income curtailment and where the mortgage industry. So if someone has a mortgage and their income is curtailed, it’s back to what you asked him about earlier. What do we see in the delinquency in the delinquency world? So that’s typically what we’re watching. For example, right at the moment, the stress in the in the housing business is on the rental side of the equation because the probability of someone being an hourly wage worker is higher, that they would also be a renter. And if they are a salaried worker, they would have a higher probability of being a homeowner.
Bruce Norris: OK.
Doug Duncan: And so one of the bulk of the job loss initially was in the hourly wage worker category. So that’s that. We’ve been watching the there’s some data out there. The National Multi Housing Council, for example, puts out some data on what share of rents in some eleven million have. Rental properties are being paid on time. The concern is that when the six hundred dollars a week unemployment insurance runs out on the thirty first of July, they may make their August rental payment, but maybe not September unless there is some additional stimulus. So that’s kind of how we patched together the composition and momentum of employment with what’s happening with income and how that might impact sectoral components in the economy.
Bruce Norris: Coronavirus round two. So we’ve had states rollback some openings, so you have restaurants that are now re closing. So I guess I wanted your thought on that is you’re going to be maybe a PPP round number two, or do you think this round Coronavirus, round two, will really increase the closure of a lot of businesses?
Doug Duncan: Well, as I understand it, there has been a second round of the PPP and not all of that has been subscribed. In other words, there’s still some available for people, for businesses to take down.
Doug Duncan: So with that being the case, it’s it’s unlikely there would be a third round of that unless for those firms that had it had that took the PPP, they they were impacted a second time and somehow the Congress and White House could conclude they could control for that to extend additionally to those firms. The way I’m thinking about the virus is that we’re not say some people are calling it a resurgence. I would not call it a resurgence.
Doug Duncan: I would call it a geographic shift, because more of it has been simply that the virus moved to the south and west from the northeast and the northwest west to areas where there had not been a pickup and now there’s been a pickup in some instances.
Doug Duncan: It is true that easing has generated a resurgence. So it’s it’s actually a mix of the two. But the bigger thrust to my way of thinking has been the geographic shift.
Doug Duncan: The reason I divided it that way is because people are they’re using various visuals to try to characterize the path of the economy.
Doug Duncan: So they’ll say there’s going to be a V shaped recovery, is going to be a W shaped recovery, is going to be a Nike swoosh.
Doug Duncan: Will it be an L? Will be a square root?
Doug Duncan: You probably probably think of a few other ways of thinking about it. And the W that is a hard decline, then a partial recovery, then a return decline before a full recovery is conditioned on a couple things. One of them being this resurgence. Question of the virus. And yes, you’re seeing the reversal of some easing criteria because there when things were eased, there was a pickup in the incidence of the disease. So that would sort of align with the with the W view. But it’s that’s different than the fact that you hadn’t seen much in Texas or Florida or Arizona. And also now you are. That’s the first time you’ve seen that there. So if if New York picks up again, if Seattle picks up again, that would be a resurgence or a second round, which some people are drafting off what happened in the 1917’s, 1918 time period where there was a second round and actually the mortality rate, I believe if I remember the history