The Fed Funds Rate and Its Impact on Prices with Doug Duncan | PART 2 #843

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.

Under his leadership, Fannie Mae’s Economic & Strategic Research Group (ESR) won the NABE Outlook Award, presented annually for the most accurate GDP and Treasury note yield forecasts, in both 2015 and 2016 – the first recipient in the award’s history to capture the honor two years in a row. In addition, ESR was awarded by Pulsenomics for best home price forecast.

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 Senior Vice President and Chief Economist at the Mortgage Bankers Association. 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.

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.


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  Hi, thanks for joining us. My name is Bruce Norris. And once again, our guest is Doug Duncan, Chief Economist of Fannie Mae, somewhere, right before May of 2022 the word, well, let’s say I don’t know how long it was used transitory inflation was considered to what we were facing. And all of a sudden, we decided that wasn’t true. Was Was the waiting. When you look back, was the waiting for that rise? I don’t know, did it really add to the asset values going crazy for longer?

Doug Duncan  Well, of course inflation had picked up, which is why the Fed used the word transitory.

Bruce Norris  Right.

Doug Duncan  I started making a joke of it, telling people look, I look the word up in my Oxford English Dictionary, and it says not permanent. I have a Ford F-150. I could drive through that hole. But my point was, there’s more to the story of supply, and its contribution to inflation than the temporary effects of health concerns related to the virus. Because we were looking around the world as we always do. And we saw a significant rise in geopolitical risk. There was increasing tensions with China, there were increasing tension tensions with Russia. There were things going on in the Middle East. We looked at all those and we said, there’s actually two things going on. Yes, part of this is a function of disruption of normal supply deliveries because businesses are worried about their staff, and the interaction of their staff in the presence of this disease. And then others in global food chains have the same issue. And so for example, the boats off of Long Beach, lined up waiting to get into the port, or evidence of temporary bottlenecks in those supply chains. But the geopolitical risks that we saw rising, led us to say there is a second thing that’s going to happen is supply chains are going to get restructured because of geopolitical risks. And that’s time consuming and expensive. And I don’t know what you read. But in the last six weeks, there have been at least four major articles about companies attempting to restructure their supply chains and how difficult and expensive that is. So within a month of the Fed using the word transitory, we made that statement, and we’ve been consistent on that every since. The other thing that we mentioned, that plays into the inflation numbers, in a similar way is energy prices. And we said if decarbonisation continues to be a policy objective, it is time consuming and expensive as well. And that will underlie the challenges both of inflation and economic growth, as does the supply chain restructuring.

Bruce Norris  Okay, yeah, that’s a really good point. So starting in May of 2022 to May of 2023, we’ve had a pretty fast bump in rate. Yeah. Is that historic and speed?

Doug Duncan  It is the I believe it is the fastest ever there may have been in the in the initial Volker years, have to go back and look at the data for sure. But it’s not the fastest. There may only be one other instance.

Bruce Norris  Yeah, I think they might have had more moves, but I don’t think it was as fast as projectory. That’s true.

Doug Duncan  I think that’s right. Yeah.

Bruce Norris  Okay.So Does the resilience of the real estate market at this point. So this has sort of been progressing now for a year. And, you know, if you go to YouTube, there’s all kinds of things going back a year that the real estate market is going to crash and it’s all over and has it played out? It’s played out a lot differently than that. So I just want to know what your take is what did you see a year ago? And what do you see going forward?

Doug Duncan  A year ago, our initial estimates of peak to trough house price declines were about 10%. Currently, our thinking is about half of that.

Bruce Norris  And that encompasses what already has occurred.

Doug Duncan  So that’s correct. Yeah.

Bruce Norris  Isn’t that astonishing, that rates have doubled. And that’s the damage?

Doug Duncan  It is, it’s pretty amazing. And there’s two or three factors that are playing into that primarily supply. The Boomers are doing exactly what they said they were going to do. They are aging in place. They’re going nowhere. And what was learned on the remote provision of healthcare through technology actually extends the time that they can stay in their homes. If you can get healthcare over the internet, by holding your iPad up to the affected area. It’s an efficiency maneuver, it will keep you in your house longer, right?

Bruce Norris  It might keep the doctor in their house too, because they don’t have to rent an office.

Doug Duncan  That’s exactly right. It’s we still haven’t seen all the implications of of what was learned. That’s one thing.

Bruce Norris  Okay.

Doug Duncan  Second thing is the group that never gets talked about, which is the Gen Xers. I’m giving them some airtime. They locked in two and a half to 4% mortgages, and there’s no reason for them to go anywhere either. So that lock, in effect, combined with the aging of the boomers in place, has seriously constrained the amount of existing home supply that’s available. And that’s typically the place that first time buyers go is to existing homes, which they then put in some sweat equity. And then when they do move up the ticket, the equity from that and often then buy a new home as a second home or a third home. But this time is different. Because of that supply constraint, much more of the weight is on the back of the builder, who still has struggled to catch up with the production because of all the disruptions of the ’07, ’09 downturn?

Bruce Norris  Well, I would think they probably had, like they were biting their nails six months ago going, oh, yeah, we’re our volumes gonna die. And then what was really interesting, we’ve taken time to look at the percentage of the market that’s new versus existing homes. So the like, a terrible year would be like, 09, it’s only 13%. But even in a boom year, it’s 21, 79 to 86% of that inventory is supposed to come from existing houses.

Doug Duncan  Right.

Bruce Norris  Well, even if your sales volume is down by 40%, which in California, it is you still have a shortage of what’s for sale?

Doug Duncan That’s right.

Bruce Norris  Yeah, that’s, that’s pretty amazing.

Doug Duncan  And that has been a factor in keeping house prices up. And, and so our current thinking is peak to trough maybe a 5% decline. But it’s very different geographically. If you look at the western half of the United States, most of those markets have seen some of them significant price declines in specific markets on the eastern and midwestern parts of the United States. There’s still markets where prices are rising today as opposed to declining. So there is a big geographical distribution difference I’ve in conversations with audiences that include both multifamily and commercial plus residential people, that the phrase that I’m using to describe that is the geospatial distribution of real estate values.

Bruce Norris  Okay.

Doug Duncan  Spatial means the the spaces in geography, where value in real estate is changing are impacting both residential and commercial properties. And they’re linked through employment. So what the work from home effort does is it weakens that link geographically between where you live and where you work.

Bruce Norris  Right.

Doug Duncan  And so we’re seeing some structural shifts in the buy markets, particularly secondary and tertiary markets, which are By definition, less expensive for residential housing, you’re seeing some shifts in that space. And in the high cost markets, you may see more declines in the commercial, particularly office space than in those lower cost geographies.

Bruce Norris  The percentage of people that are currently upside down in value to their mortgage. So like very, very, very small.

Doug Duncan  Yeah, it, tiny.

Bruce Norris  Okay, which is not true at the last peak at all. So that’s a very big difference. Yeah. The other thing too, is that, you know, you’ve really had aggressive rent raising. So if you’re making a decision, okay, and you’ve got a two and a half percent mortgage. You could actually rent that thing for positive cash flow, if you lost your job and had to go somewhere. That’s unusual. So that’s a choice.

Doug Duncan  Yeah, one of the things that we’ve noted is that if you move from a high cost market to a low cost market, it’s possible that the size of mortgage that you have to take in that new low cost market is low enough that even though interest rates on that mortgage is greater, your payment may be the same or lower.

Bruce Norris  Absolutely. Well, you know, we were doing spec homes in Florida, where the buyers very often from New York. Well, there you could have a 50% mortgage on your house and own something nicer in Florida free and clear.

Doug Duncan  Right, exactly.

Bruce Norris  So definitely, I’d rather be sitting in Florida than California, not too many places can migrate to California profitably.

Doug Duncan  That’s right. Yeah. And that’s all part of that geospatial value of real estate. And it’s possible also, I think some of the Gen Xers may become investors. So another way that that can work is that you’ve locked in a 3% mortgage on the property that you have today. But you have to move or you want to move to a different location, you can rent that one out, and rents in many markets are higher than what it was to purchase at that point in time.

Bruce Norris  Right.

Doug Duncan  So the the surplus of rent over that mortgage payment can be used to subsidize the mortgage payment in the place that you move to.

Joey Romero  I was just thinking that speaking as a Gen X-er you know, I’m, I’m in that exact scenario, I live in a very nice part of, you know, the Inland Empire Corona. And, but for me, like I was thinking, you know, as Bruce gets creative, like, where’s the incentive, like, you know, like, give me a zero down program so that I go get that 6% interest rate somewhere else, that might offset and actually make me want to do that at this point.

Doug Duncan  Yeah, there are some opportunities there.

Bruce Norris  The other thing that really changed over time when I bought my home, you know, I certainly wasn’t thinking about this. But I think the average length of stay was four years, more to five years, that’s grown to about 13, without the benefit of having a mortgage. So it starts with a two or three.

Doug Duncan  Right.

Bruce Norris  So that no way that’s going to go down. That’s going to stay there or go up.

Doug Duncan  Yeah, yeah. The The only thing that would alter that is mortality for the boomers.

Bruce Norris  Absolutely.

Doug Duncan  And mid career moves for the Gen X-ers.

Bruce Norris  But again, we talked about that might not make that home available. It just may make it a rental.

Doug Duncan  That’s exactly right.

Bruce Norris  Yeah. On the Florida on the back end, and I have seen those statistics, that after another 10 years, I think you’re tossing out 25 to 30,000 houses a year that are no longer have an owner.

Doug Duncan  Well, that is a possibility. And that there was some discussion that that might happen to the boomers suburban four bedroom homes, because the next generation was having less children. Well, now, if you’re two things, one is house prices today expect two full incomes, that the level of price now reflects the full participation of women in the workforce. So house prices have adjusted to accommodate that income, that social structure of incomes. So, it when you go to work from home, now, whereas you might only have one child, you may have two jobs. So you need a parent bedroom and child bedroom and maybe one or two offices. So the discussion of those suburban four bedroom route homes has really disappeared. You don’t hear much discussion of that today. Okay, so Because what’s the for the next generation? Is there something like that that holds true?

Bruce Norris  How do you feel? The employment situation? I haven’t read a book that I want to it’s basically talking about, why are there so many millions of adult working age people on the sidelines, they’re not even looking for not, they’re not part of the percentage, let’s say, you know, of unemployment, because they’re just, they’re not even counted anymore, because they don’t have any intention to find a job.

Doug Duncan  Right.

Bruce Norris  Well, who are they? How does that work?

Doug Duncan  That you can see that in the decline in the labor force participation.

Bruce Norris  Yeah.

Doug Duncan  Working age men. And so part of that has been attributed to the opioid issue. Oh, there’s been various issues, mental health issues, things like that, are some of the explanations, but I don’t think there’s a single concise view of why exactly all that has happened.

Bruce Norris  Okay. Yeah, that’s a pretty strange phenomenon to have that many people just not work you go on?

Doug Duncan  Well, that’s right. And, and it also has affected age, life expectancy, life expectancy is lowered a little bit, mainly in response to that. Okay.

Bruce Norris  So what category either long or short term? Does the Fed concentrate on to say, Okay, this is the direction of our next decision.

Doug Duncan  Well, the thing they’ve spent the most time focusing on is employment. So when last Friday’s employment numbers came out, the market took a little while to sort through what to make of that because it had some mixed components. The February and March, estimates were revised downward pretty significantly. But the April numbers were stronger than expected, quite a bit stronger than expected. The the part time work fell off. Significantly, that’s often viewed, part time employment is often viewed as if it’s increasing companies are testing whether they’re going to need another full time employee. So they hire somebody part time first, before converting them to full time. If it goes the other way, if there’s a reduction in part time labor, then it suggests they’re thinking they’re they don’t need as much labor and things are slowing down. So that actually fell. So that suggested weakening, combined with the revision downward of February and March, those three things aligned. But the headline growth in April of employment, the stability of the workforce participation rate, and the growth, the actual increase in compensation, worked against the Fed, which all of those things, of course, came out after the Feds meeting. So the Fed wasn’t didn’t have that data in front of them when they made their decision. But I suspect that Powell felt that justified the approach that he took, in the press conference, that mixture of things supported his point of view.

Bruce Norris  Okay.

Joey Romero  Can I ask a question about that employment number? Does it factor in the type of jobs or the types of careers that younger kids or younger adults are choosing to like, for example, influencers, you know, digital marketers that are freelancers, you know, there’s so much of that going on everybody doing side gigs, and so they’re not an actual employee of a company. Does that factor into those those unemployment numbers?

Doug Duncan  It does, there’s actually several different categories of employment that they report, the one that the press always cues on is the three, that the third, which is the the biggest, most aggregative measure of employment, it’s called payroll. That’s the one that the press focuses on primarily, but there are additional measures that they that they release the overtime. The core measure that the press talks about has achieved the primary status because it seems to be the best measure over longer periods of time. It is true that the that there’s still some uncertainty about self employment and gig employment. But the Labor Department has been doing research on that and attempting to get better statistics. to your point about how that shows up in compensation, you will see if you plot average hourly earnings of which released monthly over the course of the pandemic, there’s a huge spike upwards in average hourly earnings. That’s because the job category where the employment losses were the greatest was in the services sector, which is in general lower compensation than the professional and business employment numbers. So when you were removed from the denominator, a high share of low wage jobs, the average that remains goes way up. That is that makes sense. Yeah. And and the reason that the service sector workers lost their jobs because they work in restaurants and sporting events, and airplanes and hotels, and places where people congregate, and of course, people stopped doing that when the virus hit. So lots of those, and the housing issue there is the homeownership rate of service sector employees is only 40%.

Bruce Norris  Okay.

Doug Duncan  Part of the reason you saw the spike and house price was the Payroll Protection Program was for salaried workers who were in categories where they could potentially buy homes. And you saw this huge transfer of funds, which showed up in a significant increase in demand. While supply didn’t move at all, necessarily, then spike, there was a price and spike in price.

Bruce Norris  Okay. Going forward. You know, what’s what’s next? Do you see that we’re going to have a recession by the end of the year?

Doug Duncan  We’ve had in our forecast for about this time, for us to see a recession, we put it last April, into this year’s forecast expecting we would see a mild recession. By mild I’m about a half a percentage point blind in GDP the second half of this year before recovery, beginning maybe the second or third quarter of next year.

Bruce Norris  How do you think the Fed fed reacts interest rate wise? So if they say they yet, let’s say they’re currently at whatever the five and a quarter, where do you think changes?

Doug Duncan  Right now are our formal forecasts, which are working on updating today and tomorrow, our formal forecast at the moment has the Fed holding interest rates where they are until December of this year in which time they would cut one quarter point because that recession would be underway. But we are taking Powell at his word, based on what I said to you earlier about the double dip risk, and about the Greenspan put risk, that he has been explicit that we will hold rates higher longer than you think. So the market keeps saying the Fed is going to cut three times in the second half of the we don’t buy that we think Paul means it.

Bruce Norris  What about the stability of what you have a recession? So the stability of the real estate market, as far as I’m concerned about a glut of foreclosures? And is that probably very unlikely to occur? Because of also, it looks like we have still a lot of reserves in the bank.

Doug Duncan  Well, the the rise in foreclosures is unlikely, primarily because there’s so much equity in homes, that if you are in trouble and not going to be able to sustain it or sustain your mortgage, or get some sort of a restructuring, you’d be able to do a pre foreclosure sale and retain some of that equity rather than going through foreclosure. And to this point, the GSEs data don’t show any significant change in delinquency. FHA delinquencies have risen. But the quality of underwriting has been pretty strong.

Bruce Norris  Doug, thank you so much for joining us. Always enjoy talking with you.

Doug Duncan  Oh, absolutely. It’s a pleasure. I likewise, I was enjoying the conversation. You bring good questions to the table. It’s fun to have a discussion.

Narrator  For more information on hard money, loans and upcoming events with The Norris Group, check out For information on passive investing with trust deeds, visit

Aaron Norris  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 and click the Hard Money tab.



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