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
- What is the Fed?
- How the Fed creates liquidity
- The 3 rules of forecasting
- What new behavioral habits will COVID-19 create?
- Do we have elements of deflation or inflation coming our way?
- What home buying habits will COVID-19 create?
Narrator This is the Norris group’s real estate investor radio show the award winning show dedicated to thought leaders shaping the real estate industry and local experts revealing their insider tips to succeed in an ever changing real estate market hosted by author, investor and hard money lender. Bruce Norris.
Bruce Norris Thank you for joining us. My name is Bruce Norris and today we have a very special guest, Doug Duncan. Doug is the Senior Vice President and Chief Economist at Fannie Mae where he’s responsible for forecast and analysis of the economy and the housing mortgage markets. Doug also oversees strategic research regarding the potential impact of external factors on the housing industry, and well there’s been none of those so that’s not been a problem. He 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, the first recipient and the awards history to capture the honor two years in a row. Welcome back to our show.
Doug Duncan Thank you glad to be here.
Bruce Norris I’ve got a question about the Fed, because there’s a lot of people that are confused or concerned about them. So who is the who is the Fed? And is this a profitable venture that they’re doing for themselves.
Doug Duncan The Fed is short for the Federal Reserve System, which is a system of one central bank in Washington, DC and 12 regional banks in in various cities, which would have been very important financial cities in the early 1900s when the Federal Reserve’s banking system was developed and authorized in legislation 1913. So you see. For example, Richmond, Philadelphia, Boston, Cleveland, New York, so heavily concentration on the East Coast, you don’t see much on the west coast, San Francisco pretty much. It’s basically the it’s both a regulatory body that oversees aspects of banks, which are members of the Federal Reserve System, which is really all banks. So they have a set of regulatory responsibilities. Others who have regulation in that space would be the Office of the Comptroller of the Currency which preceded the Federal Reserve as a regulatory agency. And then the Federal Deposit Insurance Corporation, which is really an insurance company that insures deposits. So those are the those are the primary institutions. There are also state regulators as well, but it also is the institution which which manages our payment system and oversees that So, for example, in the 2007 to 2009 time period that was that was a major point in time in which they stepped in to ensure that capital markets kept functioning and buyers and sellers of securities and debt had liquidity on which to transact those trades. And then they they impact interest rates in the market by managing reserves within the banking system and providing liquidity for the extension of credit by commercial banks. So, they’re they’re a really a quazy government agency in that they operate independently from the Congress and the White House the the the Federal Reserve Board. Which is a seven person board appointed by the president with the consent of the Senate. Each of those seats is a 14 year term. It was intended that way so that it would the terms would extend well beyond any individual President’s ability to manipulate that board in practical way. Almost no one serves 14 years. So they’ll serve three or four or five years and then resign, and so someone else is appointed for the remainder of that term. The one that is different is the chairman which is a four year appointment. But they also are serving one simultaneously one of the 7 one of the 14 year terms and so they could, for example, Chairman Powell, who served on the board before he became chairman could If he were replaced when his term runs out, but still has time on his 14 year term, he could still stay on the on the board. And that has happened in the past.
Bruce Norris Okay
Doug Duncan That I’m sorry.
Bruce Norris No, I was when, when the Fed grows its balance sheet like it did in the 2009 mess. And now, again, probably to an even greater extent, when they have a balance sheet, is that something that they’ve created, they’ve created liquidity, kind of by a computer entry or out of thin air and they buy an existing asset is that kind of accurate.
Doug Duncan They they will buy off of the balance sheet of an institution. But the issues are, for example, the US Treasury, they buy US Treasury. They hold that as an asset on their balance sheet, the cash that they paid to the institution from whom that bought it is then available for lending so that through that mechanism, they can create liquidity for banks to issue loans and provide support for economic activity. So, and these is those things are done electronically, as opposed to actually passing pieces of paper back and forth. They’re done through an electronic registry.
Bruce Norris Okay. Does the Fed itself have a profit motive or they just try to keep things sane,
Doug Duncan They, they do not have a profit motive? Um, it’s basically an intergovernmental transfer accounting, really?
Bruce Norris Okay. All right. Two articles I looked at before we started talking. Both came out today mortgage rate sync to the unthinkable 2.92% and housing prices expected to decline in 6% year over year. So those two statements seem in-congruent to me. But I get
Doug Duncan Well, so you know, the three rules of forecasting, if you give a number, don’t give a date. Give a date, you don’t give a number. And if you get it right, don’t look surprised. Well, that 2.9% mortgage rate, that’s our forecast for the 30 year fixed rate mortgage for next year. So we’ve been expecting and still expect some decline in the 30 year fixed rate mortgage, because of a couple things. For one, we just spent some time talking about the Federal Reserve, the Federal Reserve, while if you look at the minutes of their last meeting, they had a discussion about what’s called the yield curve control, okay, that is that they would buy and sell securities to manage the pricing or the interest rate on those securities within a specified range or at a specified level. They they in the minutes, they said, well, we’re not adopting it as a policy. But if you look at what they’re actually doing, it has the same effect. This is not new. This if you go back in the history of the Fed to World War II, there was an agreement between the Treasury and the Federal Reserve that they would do exactly that, to keep the cost of credit low to to make the funding of world war two less expensive. In 1951, they signed an accord with Treasury to sever that relationship. So this has a historical precedent. And in effect, that’s what’s happening today. And our view is they will hold the 10 year Treasury rate which is the the base price off of which mortgage is going priced ultimately in the 0.8 to 0.9 range. And today, the spreads over that to the mortgage to the street rate in mortgages is wider than what have been in the past.
Bruce Norris Right. Why?
Doug Duncan Because one of the things that happened in the most recent market turmoil was that mortgage lenders could no longer sell mortgage servicing rights. There was no market for mortgage servicing rights, and the sale of those mortgage servicing servicing rights is one of the profit centers that keeps independent mortgage companies liquid. So if they couldn’t sell those and hold on to those mortgage servicing rights, they’re going to widen spreads to increase profit margins to stay in business. So now since the market for more servicing rates is starting to come back. Some of those institutions are now selling those rights off and can therefore reduce their profit margin. That’s only a piece of this. The other piece of it is that interest rates are so good. There’s a massive wave of refinancing underway. We think somewhere north of 1.6, maybe $1.8 trillion of refinances this year. We’ll update our forecast here in a couple of days. So you can see what it is but the huge wave of refinancing and that is creates a capacity constraint in the mortgage business, such that even if you lowered your spread and interest rates, you couldn’t do the business anyway. So why would you lower the rate?
Bruce Norris Okay
Doug Duncan So those are a couple of factors that are keeping the spreads wide and as the volume of loans available to refinance falls because people have refinanced, then it’s likely that competition will bring that spread down as well. So those are a couple of reasons why we think the mortgage rate will actually come down more.
Bruce Norris Just some unintended consequences of having this, this an interest rates so low, and let’s say it goes goes lower someday. Who knows when it’ll go back up? So long term consequences is that you’ve probably going to refi 90% of America that won’t need to refi for the next decade.
Doug Duncan That’s right. No question. It’s called typically the people in the industry is jargon for that is the lock in effect. If you’ve got a 30 year fixed rate mortgage at two and three quarters percent, what are the chances you’re going to want to give that up pretty slim?
Bruce Norris Well, not only Yeah, you’re talking about not moving. I agree with that as well. But I mean, you’re not going to need to refi, So the low
Doug Duncan No, definitely. But you may also, you know, I know that you work with some folks that are single family rental owners. If that’s a property, let’s say I bought that as my, my home to live in, but then I decided I wanted a bigger home, I could keep that the funding costs for that house pretty low, and buy another one.
Bruce Norris Absolutely.
Doug Duncan So, yeah, there’s several impacts of those very low interest rates.
Bruce Norris You know, I’m going to bring up something new. I might have talked about this before. And I what happens is, you know, you have invited me to speak in Washington, DC, and it seems like it takes a while for things to happen in Washington, DC. I think there’s you know, I think there’s a unique kind of got a unique opportunity right now. You got historically low interest rates, I mean, Sean O’toole when I once went to the Library of Congress for three days researching interest rates all the way back to the 1800’s. No joke, and trying to figure out if these were the lowest rates ever. And so now they’re even lower. So okay, we’ve got the lowest interest rates, which means, ironically, that we have a chance to provide affordable housing. And we don’t have to, we don’t have to pay a dime for it. It’s already there. So
Doug Duncan From a credit perspective? That’s right.
Bruce Norris That’s right. So that’s all it really matters to somebody on a monthly basis. So in Florida, you know, we’re building houses that go for 230. If you match a two and three quarter interest rate mortgage on that, it’s way less than rent. That would be a that’s a lifetime changing event. So here’s my here’s my suggestion. I’m going to bounce it off of you. Why couldn’t we have for a couple year period and nothing down loan program for an owner occupant, they qualify like a VA loan does, which is a very successful program where they have to have reserves and they have to have whatever VA requires, but we give a chance for a lot of people who feel disenfranchised, and in fact may not ever be able to own a chance to own. Now, I understand that’s going to create a failure rate. So let’s do this as a loan policy. Let’s say for just this loan policy, no state foreclosure processes, we’ll apply that if there’s somebody that’s late six months, then we do in fact hold a foreclosure sale. But the opening bid is the late payments. The winning bidder takes over the loan. There’s no REO’s, there’s no loss of principle. Whoever is the winning bid, just makes the payments.
Doug Duncan Sounds interesting. How, if you’re, if the original intent was to create owner occupants, a low cost entry for owner occupants when you control the auction that it can only be others entry level owner occupants
Bruce Norris Sure, why not? The other thing is you can also allow that loan to be taken over there used to be a program. FHA had what’s called a simple assumption. The loans brought current send in $45 transfer fee. Bruce Norris used to own it, Doug Duncan owns it now. No, qualifying you qualified by making the loan current. And you, you’d have a system see. And you know, as you know, when the price damage happens is when REO’s are massive and short sales are massive. I can’t imagine I can’t imagine alone at 2.75 fixed rate for the duration of the loan ever being returned because there was a non bitter, and by the way, I wouldn’t I wouldn’t eliminate investors. But I would say you’re right. Let’s give the consumer first round. And then let’s say there’s an I’ve been in those auctions.
Bruce Norris Doug, I was in an auction one time now this wasn’t at physical auction, but VA had an REO list. There was a, there was an REO that was rented for 550. They had paid or excuse me, they you know, is probably, I think the opening bid was 13 grand went through the round of owner occupants who all said no, this is probably 95 which is really what spurred me on into writing that first report because I could not comprehend how real estate wouldn’t be worth. That purchase price. They were actually the asking price was 15 grand, I bought it for 13 six, and I bought a car a couple days before that for for two grand more than that house. So there there there are times where the investors is needed, so I wouldn’t completely make that not a not happen but yeah
Bruce Norris Be my guest to put the owner up front because that just matters to me it did anyway, Doug, honestly, I still remember with emotion. I was you know, I got married at a very young age, the dream of owning a home was a big, big deal to me. And it seemed like a long way out and took me about four years to get it accomplished. I still remember mowing my own lawn on the Saturday the first time and actually thinking I’ve I literally have become a man.
Doug Duncan Yeah, I agree. You’re that is a that is a long held. Probably not just American, but certainly an American ideal is the dream of home ownership. No question about it. And it does invest you in the community in ways that are important. Socially.
Bruce Norris That’s right for the I think I think we’ve got a chance to I think this industry and you guys in particular, who control a lot of the mortgage market, if you could create a product like this, I mean, I think it could go a long way to having people feel like Okay, wow, I’m part of the deal now. You know, I’m building equity and I’m saving, I’m saving money from my rent. I mean, there’s never been a cycle like this. If we don’t take advantage of it in this way. I feel like we’ve really missed the boat
Doug Duncan Question. I know you’re building. I think you’re in my hometown Cape Coral.
Bruce Norris That’s right.
Doug Duncan And it certainly is a cape girls bedroom community for lots of a working places up and down the coast here and it is very affordable. To your point. The question that given that the problem for the last four or five years has been that supply has grown less rapidly than demand has grown. I think the trick would be how do you get supply in place fast enough to take advantage of this while the market rates are are where they are because they’re going to be here where they are for a while, but I think so I think that’s a really interesting idea. I will take that back and offline and probably contact you offline and talk some more about that.
Bruce Norris Okay. Well, to be honest with you, that’s the one thing Cape Coral hasn’t sold is that area, all of that area of Florida. It doesn’t need any track lots being built. You already have. So if you if you basically told pretty big builders, okay, we’re going to have demand up the Ying Yang. John Burns, give give a few people call and say go to go to Florida and build the heck out it’s it’s pre sold, man. I, I think it could happen. I really do.
Doug Duncan Well, it’s definitely it’s definitely happening. I mean, I was at my father in law’s house and he also lives here in Cape Coral. And within two blocks of them, there were three had been three empty lots. All of them are under construction right now. I think this is the fastest growing city in the United States at the moment because it is affordable.
Bruce Norris I’m flying there tomorrow. My wife and I, yeah, we’re going to move there. And
Doug Duncan Oh, wow!
Bruce Norris Yeah.
Doug Duncan We need to connect on that offline too. So we can, we can welcome you.
Bruce Norris Okay. Yeah. Give me Give me a heads up of. We’ve got a property being built that we were it was a spec. Really, we might move into that temporarily while we pick and choose a permanent spot for for a long period of time.
Doug Duncan Awesome.
Bruce Norris Here’s a here’s a good question too, about the Coronavirus. We just touched on a little bit about interstate migration. So Florida is one of those recipient states. It always gets people from New York and New Jersey I would imagine that’s going to be growing rather large amounts, but it also gets money from California. There’s a Florida is the number one destination of money migration by a long shot. So Florida Florida’s billions of money coming into the state outpaces number 234 and five combined. And that was on the chart a couple years ago. So I think Florida is going to be in that’s one of the reasons I want to be there because a lot of our business is going to be in Florida, as California has, you know, we got some rules going on in California that are pretty, pretty scary. So there’s a lot of people that say, you know what, I’m gonna get the heck out of here.
Doug Duncan Yeah, there’s a it is. It’s a preferred location for a number of reasons. taxes, one of them. The business climate is it’s a good business climate. Obviously, people like warm weather, if you don’t mind it occasional, very windy, wet event under the top of a hurricane. And, you know, think people are thinking about things like climate change, but that it’s still highly desirable place to be and it is in. In most areas of state it’s an affordable state to be in the the migration in the country. There’s a number of things that impact migration, most migration is actually within County. If you look at just when did people move their place of residence, that has to do more with career growth and you got a better job and you had kids and you moved into a bigger house and there has been some discussion about whether we will see a systematic de densification Of our population so people observed the true anecdotes of people in New York City. Suddenly the the house values in Connecticut rose dramatically in some sections. People were attempting to escape the city to get away from the virus. Or you saw like you heard it. When we talked before about Bend, Oregon see the real estate marketing on fire because of Californians moving north to get away from the virus. Well, those are those are anecdotes whether there is sufficient movement of that type to say definitively that the virus has caused a behavioral change that will systematically reduce density is an open question. Okay, Bill Fry at the Brookings Institute in London. done some work that showed. And you’ve you’ve heard me tell this story before an earlier the earlier version of this story. So I’m going to add to it and I’ll recap. The that version. This it already has been underway for four or five years, because the millennial’s who were who populated a lot of the growth of the urban core over the last decade are now having are getting married and having kids and they’re moving out to get more space, right, or, or schools or whatever. So you recall we said that all the early stories about the millennial’s learning the lessons of the crisis housing crisis of ’07 ’09 was they’re gonna have 300 square foot apartments with amenities because they don’t want to get into the losing the house category. We said at the time that’s not true, because they’re telling us they eventually want to own a home. What is true is the only place you can get a job as an urban core. So if the first thing you had to have to buy a house was a job, you’re going to go to get a job. And if near that job, the only housing available was 300 square foot apartments. That’s what you’d take. But your long term aspiration when employment grew, and you had the option geographically, you would move to where you could own a single family house. And that’s what’s happened. That started to happen in 2015. And we announced that we said that the Millennials are now driving the demand curve for home ownership. That is still true. So that was already underway. The question is how much did the densification add to that issue? And is it sustained or is a temporary thing until such time as the the virus is under control, in which case there will be some return impetus to to the city because of the productivity benefits of concentrating employment in smaller areas, because there are clear productivity benefits from that. I think it’s an open question whether that is a sustained move. And part of it, of course has to do with the quality of that urban environment. If the quality of the urban environment degrades further, then that’s simply an incentive to create what what john burns who you mentioned earlier calls servant Exactly. I just wrote that word on my sheet. Yeah, that’s a great john did a great service in coming up with that because it’s so in the metropolitan areas are large enough that some of the outlying suburbs are now really urban themselves. In the DC area, the example that is the Tyson’s corner area, which is not a major metro area of its own, even though it’s in the DC MSA.
Bruce Norris Because of the virus and also tech. It seems like they’re probably going to be new habits developed to where you go, Okay, well, I don’t have to go be interviewed in New York City, that type of thing. I mean, you travel all the time, and all of a sudden, you probably haven’t been. And zoom seems quite acceptable. So I just do you think there’s that kind of reshaping of habits to where there’ll be more things done from a distance.
Doug Duncan That’s something we’re thinking hard about at the moment. There’s several attributes of that I, my wife owns her own company, which has been a virtual company since its origins about 10 years ago, a couple of weekends ago, she came to me, she said, I know you’re talking at the Fannie Mae leadership level about working remotely and a long term, how that’s going to work. And she said, Let me tell you a couple of lessons that I’ve learned. And all of her employees work from their home, she’s got about a dozen plays, said I’ve turned over three quarters of my staff in that 10 years because there are actually a limited number of people be constantly productive in a remote environment. So that’s that’s one issue.
Bruce Norris Okay?
Doug Duncan Second is innovation takes place where nuances in conversation can be very important. And you can’t capture all that on a video screen. You need to be with people. And so she’s had to fly them in at different points in time when they were working on a critical issue. So they could be together, because they couldn’t solve the problems without being together. So that’s those are a couple of challenges that that will suggest. Yes, I think there’ll be more remote working than there’s been in the past but in certain categories of jobs, okay, because some categories of jobs have a constant productivity level that doesn’t really change by proximity, but others it matters. So that’s one thing to think about. The second thing to think about is there was a story in the Wall Street Journal a few months back about that. 20 Mil 21 million Boomer homes that are big suburban homes, that their prices are all going to fall because there just isn’t the demand for them. Well guess what, if what you need now is an extra room for an office, even if it’s only for half time, that four bedroom houses now actually a three bedroom house with one office, or maybe a two bedroom house with two offices, because part of the time you got to be working remotely, so maybe the value of that house is more sustainable than what you imagined. In previous circumstance.
Bruce Norris That makes sense.
Doug Duncan Um, so I think there’ll be some compromises like that.
Bruce Norris Last question, and I really appreciate you spending so much time with us today. Do we have elements of deflation or inflation coming our way?
Doug Duncan You know, it’s really interesting to be in the economics profession today because there’s a lot of debate, which, if it’s stated carefully is questioning what has been some of the dominant macro economic theories and their validity. And as you as you probably aware, there’s a new theory called modern monetary theory.
Bruce Norris Yeah
Doug Duncan That has urged as well, because some of the previous theories couldn’t explain why the Federal Reserve has been trying to get inflation up to 2%, on a sustainable basis for the last decade, has had almost no success at it. And so that’s given an opening for others to try to start explaining things in one sense. Interest Rate controls and holding rates at very low levels is a form a sort of an inverse form of inflation, from the perspective of people on fixed income, but with savings that they were intending to spend the earnings on if you’re only getting 1% interest on your savings account and you had planned because of history that you would probably be getting 5% right. That’s probably the reason you’re a checker at the grocery store at the age of 70. When you had planned not to be that
Bruce Norris Right
Doug Duncan That’s a so that’s not deflation. It’s it’s sort of the flip side of inflation. If inflation is running at 7%. In your, your savings accounts are only writing to 5% you’re losing 2% purchasing power each year. Right? Well, it’s sort of that in reverse, and could it could there be deflation? Certainly. That’s part of the reason that you’re seeing experiments in negative interest rates around the globe, which are Federal Reserve Bank has said they don’t prefer to go there. But they haven’t absolutely said they wouldn’t go there. Although hard to see the value of that.
Bruce Norris Just to confirm you said, they would go there. If they were trying to protect against deflation, correct?
Doug Duncan They might they’ve said they don’t they don’t view that as a policy tool that they want. to use, like I said, under no circumstances will we use it.
Bruce Norris That’s the thing about right now. And it’s there’s a lot of things that you’re putting in place. It’s hard to, it’s hard to unwind. And that’s the danger. You know, when you got the Fed’s balance sheet that could go up to whatever, you know, in many trillions of dollars the world.
Doug Duncan We think it’ll be about 8 trillion by the end of this year.
Bruce Norris Yeah. So, you know, we the economy had a conniption, what, a couple years ago when they reduced it by hundreds of billions. So I guess you’ll start to see, okay, is this permanently a fixture year going forward, that your balance sheet is going to be this and interest rates are going to be 2%? It’s at some point, you know, and I think that modern monetary theory basically says the level of debt doesn’t matter.
Doug Duncan That’s correct. That’s pretty much what they’re saying. I don’t subscribe to that myself. But in a sense, we’re testing that right now.
Bruce Norris Right? But if you’ve failed the test so then we have another word is that debt Jubilee?
Doug Duncan That’s the those are troubling questions to which we don’t presently have the answer because we’ve never we’ve never been in the circumstance. We’re at the levels of federal debt now that we were when we were fighting World War II. Exactly. And we’re not fighting World War II.
Bruce Norris So we’re fighting a war I guess though. That’s interesting.
Doug Duncan We are we’re against a virus.
Bruce Norris Yeah. Okay, that thanks so much.
Doug Duncan You bet. My pleasure.
Bruce Norris Okay. Bye Bye
Doug Duncan Bye bye.
More information on hard money loans and upcoming events with The Norris Group. Check out thenorrisgroup.com for information on passive investing with trust deeds, visit TNGtrustdeeds.com The Norris group originates and services loans in California and Florida under California DRE license 01219911. Florida mortgage lender license 1577 and NMLS license 1623669. For more information on hard money lending, go to thenorrisgroup.com and click the hard money tab.
More information on hard money loans and upcoming events with The Norris Group. Check out thenorrisgroup.com for information on passive investing with trust deeds, visit TNGtrustdeeds.com
The Norris group originates and services loans in California and Florida under California DRE license 01219911. Florida mortgage lender license 1577 and NMLS license 1623669. For more information on hard money lending, go to thenorrisgroup.com and click the hard money tab.
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