Mark Palim, Director of Economics for Fannie Mae, Joins Bruce Norris on the Real Estate Radio Show #292

On Friday, October 19, the Norris Group proudly presents its fifth annual award-winning event I Survived Real Estate. An incredible line-up of industry experts joins Bruce Norris to discuss perplexing industry trends, head-scratching legislation, and opportunities emerging for real estate professionals. Proceeds for the event benefit Make a Wish and St. Jude’s Children’s Research Hospital. This event would not be possible without the generous help of the following platinum partners: ForeclosureRadar and Sean O’Toole, the San Diego Creative Real Estate Investors Association and President Bill Tan, Investors Workshops, Invest Club for Women and Iris Veneracion and Bobi Alexander, San Jose Real Estate Investors Association and Geraldine Berry, Frye Wiles, MVT Productions, and White House Catering. Learn more about the panel and how to attend at

Bruce Norris is joined this week by Mark Palim. Mark is a director in the economic and strategic research group at Fannie Mae. His work focuses on the impacts of trends in the financial services sector on the economy and on Fannie Mae. Dr. Palim has a Ph.D. in economics from George Mason University and a B.A. in international studies from John Hopkins University. He lives in Bethesda, Maryland and will join the panel at I Survived Real Estate. Bruce described Mark as being in the What’s Next? Business. He has to look in the future and tell people what is likely going to happen next. Bruce wondered what he looks at to give him a blueprint of what he thinks is coming. Mark said the first and most difficult thing is to try to obtain as accurate a read as possible on what current conditions are. Secondly, you want to have a sense of what consumer and investor attitudes and expectations are. These are the two things he said he would focus on and keep up to date on.

Bruce thinks as an economist that Mark would be very concerned about what is going on in our country. Bruce wondered if this is one of the few times that he really has to look outside of the borders of our country and be concerned about what is going on over there. Mark said this is very much the case. We are very fortunate that we have over 300 million people in a big-risk and dynamic economy. Often focusing on what is happening in the U.S. is the key. In recent years, our growth has been generally weaker than what everyone else would like. Exports have been the source of strength, so therefore what is happening in foreign markets is that much more important. Particularly this year if you look at what is happening in Europe and the slowdown in China and how bad this affects capital and interest rates, then we see that we are really having one of those periods where the global economy is having quite a strong effect on both the financial markets as well as on the real economy. This could include output, whether it be farming for exports or industrial output in terms of exports and competing with imports. It is definitely one of those years where you just look at the U.S. economy.

Bruce said if he was in the real estate business and someone told him that you can expect a credit downgrade for the U.S, Bruce said he would have been concerned about what the ten-year T-Bill would have done, and it did not do what he thought it would have done. Since it is half of what it was, Bruce wondered why we this is the case. It was down to 1.3, and now it has gone up to 1.8. Anything under 2 is unimaginable. Bruce wondered how we ended up with these interest rates so low, and he wondered what event would change this. Mark said he remembered in 1988 when he started working, it was at about 10% and he never thought he would see it below 2%. We went below 2%, and in some ways this just a very unhealthy place and still is for Treasury rates to be. He is not saying this because he does not want the government to be able to borrow at low rates, but rather because it shows investors’ concern in risk diversion and their fear of putting their money in other bond markets let alone putting it into the stock market or a venture fund. Interest rates that low typically indicate either the possibility of a downturn or an incredible risk diversion for investors. It is good to see it come back after 1 ½% and move up a little higher, but in a lot of ways it would be good to see it back over 2%. This is sentence Mark never thought he would utter in his entire life.

What is really interesting about all this is it has really created dislocation. Somebody has a lot of cash and is looking for a yield, and some of it landed in California real estate because they could at least buy a house free and clear, rent it, and have some kind of a yield. This is creating unheard of demand in our marketplace, and it has really been a game changer. One of the things that is not good for interest rates to be where they are at is for the poor guy who saved all his life and has $1 million. If he was counting on some yield on a ten-year T-bill, this is not happening. Bruce wondered if Mark foresees interest rates being very low for another few years just because of what he sees coming. When you get to the T-bill area, the interest rates are only a function of Federal Reserve policy and them lowering interest rates. This hurts savers and those who are retired on the fixed income. It represents a certain amount of wealth transfer going on between cross groups and the society. When we look at the economy and consider what we think the Federal Reserve is likely to do and what is likely to happen with interest rates, we are forecasting that for the next few years interest rates are likely to remain quite low, especially at the short-end. Even the ten-year treasury rate looking out to 2014 or even 2015 will most likely go to 2%. For the near future, given the outlook for the economy and the amount of deleveraging as well as the outlook for global growth, it will most likely be a historically low interest rate environment.

There are certainly two camps of very educated people. Some say we can expect a lot of inflation. The ten-year T-bill tells Bruce there is not much concern about that in the marketplace. Currently the bond market is not focused on that, and you have the rush of liquidity. Last there was a concern with the Fed as to whether we would have deflation and have a scenario like Japan had where a debt overhand and continued consumer caution actually led to very weak growth and deflation. At this point the bond market is signaling more concern with deflation and inflation, but that could obviously change.

Bruce wondered if the fiscal cliff that we have all read about coming in the next year is a significant problem that could end up causing some policy changes. This is not necessarily from Fannie Mae, but from the U.S. Government deciding we really have to correct our fiscal outlook. Bruce wondered if there will be significant changes to that. Mark said this is an issue that has gained more currency and importance during the year, and it makes economic forecasting that much more difficult this year because there is the upcoming election as well as fiscal issues. It is difficult to forecast how things will be resolved and what compromises will be made in order to get legislation true in life. This is a major issue for the economy looking out 6-9 months. There are different estimates as to what the impact is and what different elements go into that fiscal cliff. While it has gotten the attention of one group, there are actually a number of different parts to it, which makes it that much more difficult to forecast. This includes which ones may get extended and which ones will not.

As far as trying to increase revenue, it seems like you would look at real estate as the low-hanging fruit or the favored investment type. Bruce wondered if Mark was concerned that it was going to have some significant changes tax-wise in the next couple years. Mark said this was very hard for him to comment on since there is so much uncertainty around the budget. If you step back from the budget and look at it across a number of countries, Mark said he thinks this is why there are so many bipartisan commentaries from economists on the fiscal situation, both by the former Democrat administration and Congress members. In the long run we definitely need to obtain control of the budget, or it is going to add so much to the debt of the country that you get a negative feedback loop. The OECD in Paris has done a lot of research on this by looking at when debt to GDP gets to a certain level that it just starts weigh on the economy, causing growth to slow down and you get a negative spiral where your tax revenues are affected. This makes it harder to get out of debt.

There is no doubt in his mind that something needs to be done, but it is really hard to tell which promises will be broken first or who is going to pay what. It looks like there is going to have to be some changes if we are going to still retain fiscal respect. Bruce said he hopes other countries are looking on and telling the countries they are going to have to go through some pain, and they have to do it sooner than later.

As far as the real estate market, we have been through a tough five-year period. Bruce wondered if at this point we are past the bottom. Mark said we are seeing signs of stability, which are very pleasing to see. If you look at all the different price indices being put out, indications are we are on a plateau and prices are no longer going down. At the same time, quite a few markets are starting to go up. We are really at the stage where we are making a transition from a national boom and bust to real estate really going back to being a local market and locally determined. At the aggregate level when you aggregate up all those markets, prices have probably hit some stability and have seen some improvement. Real estate is so different from many assets because it has such long lead times to build and long delay times in terms of selling and people’s emotions involved as well as the amount of debt involved. Mark said his sense is we are close to or around the bottom. There is no organization that has called a bottom, but the notion does not seem wrong to him that in many markets when the recovery fades. The only caution he would put out there is that this would be with unbelievably low interest rates. We are seeing more rates that are unbelievably low, and we will not truly be out of the crisis until we get back to a point where the Fed balance sheet is back to a more reasonable size, both in nominal terms and inflation/adjusted terms being back to a more normal level. Then we may see house prices and a housing market that can handle itself and be healthy without the support of extremely low interest rates.

What is interesting is you see signs of stability, then there are amazing things happening that are causing this to occur. Bruce thinks one of the reasons is that the inventory that Fannie Mae and probably all lenders actually have right now is less by quite a bit than it was at the peak. Mark said with REOs you are starting to see the numbers coming down with people selling. One of the reasons they have come down is alternative disposition. A lot of lenders have gotten better at using short sales and working with servicers to use modifications and other ways to deal with delinquent loans. Both of these things together are helping to reduce the inventory. On the flip-side, you see that unemployment is not getting worse but is really getting better; so this helps on the role rate into a 30-60 day delinquent. If unemployment were at 12% instead of 8%, it would be a much worse situation. Bruce realized the REO inventory is down quite a bit, and serious delinquencies are also down.

Bruce wondered what Mark’s definition of shadow inventory includes. He said he does not have a strongly held view one way or the other, but rather he likes to think of it with a couple of elements. One is to look at the 90 day+ delinquent and see what that pipeline is. Obviously not everything that is 90+ day delinquent is going to end up as a short sale or REO. Secondly, you have to look at data from the Census Bureau that looks at houses held off the market for different reasons. There is definitely room for reasonable disagreement about exactly what the numbers are. This is what Mark focuses on.

Bruce said it seems the potential for a lot more inventory to show up is there. Bruce is an investor of property, and he looks over his shoulder and sees all the foreclosure numbers coming down. However, he looks at the numbers of loan modifications, for example, and he sees that half of them that were approved ended up defaulting again. However, a very small percentage of that pile did not resolve, whether they have not been foreclosed on. Bruce wondered if it is really the emphasis now to do a short sale for all those properties or to attempt another loan modification rather than foreclose. Mark said there is not really one intent, and from talking to his colleagues who work in this area, it really is a loan-by-loan decision.

We implement programs, and frankly a short sale or modification is better both for us and the borrowers. We have some alignment of interest there in the sense that if you go through foreclosure that costs money and is basically a loss to the two parties, you have value that is being used up. If the property is sitting vacant, it is more likely to be vandalized and lose its value. Mark said at Fannie Mae they strive as much as possible to come up with some alternative solution. When you have a short sale on your credit record, that is less damaging. Bruce wondered if it was true that you would be able to obtain a loan earlier than if you had a foreclosure. Mark said this is his understanding. You are in a much better position in the long-run by having that.

Some large groups of money have shown up in California to buy property. Fannie Mae has a couple of programs. One of them involves 2,500 houses in a bulk sale. Bruce wondered if this is being tested or if it is the way of the future for some of the inventory. Mark said there was a regulator in the spring who put out a scorecard that was to help guide their strategy and priorities for the year. One of the things among those items was to come up with a pilot program. Mark said he is not involved in this personally, although he knows they have put out press releases and numbers on this. His understanding is they have a program going on, and FHFA has also put out more information on their website about what they will be doing.

Regarding the economic outlook, Bruce wondered what Mark would like to see where he would consider it a real economic recovery and is on the way to a very positive future. Mark said he looks at the unemployment rate and at the unemployment rate by education. There was a dramatic increase in unemployment for people across all levels, particularly people without a high school degree. If he looks at the civilian way before us and the participation rate, it is still very low. We have not really seen much expansion. So at the end of the day, the labor market tells you a lot about how the economy is doing. In his mind, from a public policy point of view, creating jobs and incomes is the primary role of the economy so that people can support themselves and get on with their lives.

Bruce said in the area where he lives, Riverside County, the unemployment is fairly high and depending on the construction business to improve. Construction is having a hard time wanting to get off of the floor because it is not profitable to build yet. All the policies that are dealing with real estate to support the price as far as stopping it from going down and firming it up toward heading in another direction seem to be a positive for construction. However, Bruce said he does not see how you solve unemployment in California without construction. Mark said he has no doubt that construction is part of the solution, and we are seeing some improvement in housing construction with an increase in housing starts. However, this on a very low base and is mostly heavily-weighted towards apartments. The multifamily sector has been doing very well. Over time as we work through the inventory, which is being picked up by investors, and we wait for the financial services community to get better at working through the inventory of delinquent loans and alternative dispositions. Over time as labor markets improve, we should see a pick-up in construction.

Mark Palim can be heard again on the panel for I Survived Real Estate 2012, which will take place Friday, October 19.

The Norris Group would like to thank its Gold Sponsors for supporting I Survived Real Estate: Adrenaline Athletics, Coldwell Banker Pioneer Real Estate, Elite Auctions, FIBI, Inland Empire Investors Forum, Inland Valley Association of Realtors, Investor Experts Incorporated, Keller Williams of Corona, Keystone CPA, Las Brisas Escrow, Mike Cantu, Northern California Real Estate Investors Association, Northern San Diego Real Estate Investors Association, Personal Real Estate Magazine, Realty 411 Magazine, Rick and LeAnne Rossiter, Southwest Riverside County Board of Realtors, Senoca Corporation, Starz Photography, uDirect IRA, Wilson Investment Properties, Tony Alvarez, Westin South Coast Plaza. See for more on the event and all of the I Survived Real Estate sponsors.

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