Deep Dive: Inflation, Interest Rates, & Real Estate with Doug Duncan | Part 2 #883

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.

 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. 

In this episode:

•  Housing market trends, focusing on analysis of mortgage rates for Generation X
• Rise of insurance cost
• Migration and Immigration
• Gen Xers ability to afford housing
• How the 2024 U.S. Presidential Election May Impact Real Estate

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 www.thenorrisgroup.com and click the Hard Money tab.


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Narrator: 0:01

Welcome to The Norris Group real estate podcast, a show committed to bringing you insights from thought leaders shaping the real estate industry. In each episode, we'll dive into conversations with industry experts and local insiders, all aimed at helping you thrive in an ever-changing real estate market. continuing the legacy that Bruce Norris created, sharing valuable knowledge, and empowering you on your real estate journey. Whether you're a seasoned pro or a newcomer, this is your go-to source for insider tips, market trends and success strategies. Here's your host, Craig Evans.

Craig Evans: 0:45

Hey, thanks for joining us once again, here's Doug Duncan. You know, one of the things I was thinking through is the Federal Open Market Committee. They're really, as I'm looking at it, they're kind of in a precarious position right now. You know, if they ease too soon and progress, you know, starts to, you know, tweak on the inflation side, or if they move too late and they weaken the economic activity, and especially affect employment, I guess the question is, which would be worse in your month?

Doug Duncan: 1:18

Well, so a little bit of history, I remember the term Double-Dip Recession. Okay, so when the the piece of legislation that created the dual mandate was called Humphrey Hawkins, okay, it was passed in 1978 Paul Volcker was appointed chair of the fed by Jimmy Carter in 79 and immediately attacked inflation, which was running in high double digits, right so quickly that turned and started to slow down. So the Fed was like, good. We gotta go in the right direction. They eased. There was a nine month recession in that first pass, they eased, inflation took off again. They had to tighten seriously, and then they had a serious recession of about 18 months, right? That's the double dip recession.

Craig Evans: 2:11

Okay.

Doug Duncan: 2:11

So at the outset of his chairmanship, Chair Powell twice referenced Volcker. Now you don't reference Volcker, an icon in the industry, if you don't want to be remembered in that light, right? You know, I'm no, no criticism. But the, in my mind, the reason the Fed, that he has led the Fed in the higher for longer discussion is because he does not want to see a Double-Dip Recession. So what you're talking about is, if you ease early and you get serious recession, it's much harder to quell it the second time around and that lesson was learned by in the Volcker years, right?

Craig Evans: 2:58

Right, right.

Doug Duncan: 2:59

So they're absolutely right to be concerned about which side they should come down on. And there's lots of us that are armature quarterbacks, right, but we're not sitting in the chair making the decision. And people forget, during the Volcker years, the farmers were bringing tractors to DC and tearing up the mall, and at that time, the builders had enough excess lumber to throw it on the White House lawn and all that kind of stuff. It was violent, right? People forget, inflation's really a bad thing.

Craig Evans: 3:33

Yeah, that was a, those were interesting times. So, you know, interest rates really move push and pull with, I should say mortgage rates push and pull, kind of as a direct relation to what the Fed does with their overnight stuff. Do you think that the kind of the meteoric rise? And I have a thought on that, but you know, a lot of people, I heard this yesterday, the meteor rise of our mortgage rates. Do you think that that has had the effect that the Fed wanted?

Doug Duncan: 4:16

The answer is no. If you interpret the rise of rates directly to the rate of inflation derived from the housing variables. So they would, I think, have thought that house prices would have behaved differently than they did. The thing that's hardest on housing is a significant sudden rise in interest rates, and it's hard, because incomes don't change that fast, right? If interest rates go up 2% over 24 months, that's 24 months in which incomes can rise as well. And it maybe a little bit of tightening from the household's perspective, but because their income also rose, it's not as dramatic as when it goes up. You know, 500 basis points in less than a year. That takes a while for incomes to catch up to that, right? So I and the chair did say in answer to a question, there were several questions about housing that it had taken longer for the work through in the rent data than they had anticipated.

Craig Evans: 5:36

Yeah, do you? Do you think that we could see rates potentially going even higher than we're right now?

Doug Duncan: 5:43

Well, I learned when somebody asked me as a possible countrywide could ever fail, never say never. So the answer is, it's possible. It would take some an outsized set of changes to...

Craig Evans: 6:02

...there's a lot of levers to...

Doug Duncan: 6:02

I think, yeah.

Craig Evans: 6:04

So, yeah, I know affordability is one of the favorite drivers of yours, so to speak, for housing. How do you see the affordability will rebound when income is so far behind the pace of interest rates right now?

Doug Duncan: 6:25

Well, we have a chart that we use to characterize where we are. I call it the Barb Wire chart because it looks if you've ever seen a Barb Wire when it gets loose off the reel, it tangles all up. So basically, what the chart grew up before? Yeah, there you go. Me too. I got the scars. The chart on the horizontal access has the interest rate on mortgages. So one of the things that affects affordability for a household is the rate of interest on the vertical axis, it has the relationship between the median house price and median household income. So the theory is as if, given your current income, you can probably pay something like three times that for the price of a house, right it but it varies depending on the cost of credit, if you're borrowing. So the higher interest rates are, the lower the house price relative to your income, because more of it's absorbed in paying back the credit. If interest rates fall, you can pay more relative to your income. So it's a pretty simple sliding scale, but it's also very predictable, predictive.

Craig Evans: 7:43

Right.

Doug Duncan: 7:44

It the things run right on that line until the bubble, when you know you could, if you could, fog a mirror, yep, that. And then that, of course, blew up. So then there's the bust.

Craig Evans: 7:58

Right.

Doug Duncan: 7:58

But in about 2017 it returned right back to that line up until 2020 when the pandemic hit, and now it's way above. So getting back to affordability, those are the three variables you have. House price is determined by supply and demand in housing. So people are encouraged at the moment, because they've seen listings of existing homes suddenly start to rise. Over the last couple of months. They're up fairly significantly. I think Texas and Florida leading the pack. So that's giving people some confidence. Maybe we'll get there. Get some benefit, obviously, watching the Fed and waiting for the Fed to ease rates. That's the interest rate piece, and incomes are growing gradually, so at the current pace of change of those things, in our own view, it's probably until the end of the decade till you get back to that line. But that's at the current pace of things. Lots of things can change. So it's not a near term, not a near term situation from our perspective. And the other thing that people forget on the existing home side, if I want to tweak the realtors, I said the used home sounds right, is that if someone lists a home for sale, but then they're going to buy another one, it's just churned it's not actually adding to supply. So there's a little bit of an overstatement of that situation.

Craig Evans: 9:33

Well, and you know, I was talking with Bruce two, half, three weeks ago, we were talking about this very same thing, and I'm curious to hear your thoughts, because I still think we've got, you know, there are more houses, even in Florida, that are coming on the market.

Doug Duncan: 9:48

Yep.

Craig Evans: 9:51

We're still, you know, when, when we've got the amount of houses that were refinanced with something with a anywhere between a two and a four in front of it. We're not seeing a lot of those coming on the market that are gobbling up that space, so to speak.

Doug Duncan: 10:07

I'd say you're seeing more than what people initially thought. Okay, so a couple of things. One is, I had been stating to some crowds, I said, the Gen Xers don't get much attention. So the Gen Xers are the ones that have those three and 4% mortgages, right? So this is their day. But if they have to move, and many of them will, because their kids in school or job will move them, or whatever, many of them will actually become investors, because the difference between rents where they own that house with that very low mortgage payment, uh, gives them a cushion they can use to subsidize if they have to buy, them get a mortgage where they're going to buy right in the last month, I've had three people came out of the audience after I spoke at different events and said, Yeah, I'm that person, that's exactly what we're doing. So there's various strategies that households can undertake to manage that, plus in the builder space, one of the things that you saw when and I use this as a little teaching mechanism to explain to people how markets work. When mortgage rates first went over 7% there was a pause for, I don't know, a week or two weeks in the new issue mortgage backed security market, because no fixed income investor believed that MBS would still exist when the Fed eased and rates came down and all the mortgages refinanced behind that thing. So there was no bid.

Craig Evans: 11:39

Right.

Doug Duncan: 11:39

So what you saw happen within days is mortgage lenders started offering two one buy downs, temporary buy downs, the idea being that by the end of the second year, the Fed would have eased and people would refinance out of that loan anyway, the builders started offering two and 1% permanent buy downs. That was kind of new. So two things that pointed out, one was first time buyers are a significant share of their business and that typically has not happened in the past, right? Because it's the move up buyer, right? But the problem of the first time buyer is financing, not countertops and finished basement on so that the market was teaching you there was something that was not normal in the relationships in the market. So the the 2% buy down by a builder was basically to the place where that household would refinance when the Fed is anyway, so they actually saved them all the upfront fees of refinancing. So that was an additional benefit that borrower got by that typically, my observation was it was largely the public builders that could borrow money forward and had borrowed money, and that seems to have dissipated at this point, pretty much.

Craig Evans: 13:04

A lot of that. We actually did that for a while. But it was interesting in because, you know, our bread and butter is affordability of houses. You know, we for Douglas Brooke Homes, we got six models. We build them like Novocaine, you know, over and over and over. What we started seeing was, you know, of course, I couldn't afford, what,, you know, the National Republic, yeah, I couldn't afford to get them at those rates, right? So while we were offering that, that wasn't our biggest sellers. And so what we were able to get more competitive on was the two one buy downs and so that was the aspect that we saw. But of course, as you said, mostly even the nationals have come away from the right. So I had another interesting question brought to me last week or two weeks ago, when I was in California, and it was, do you think we'll ever see a 40-year product?

Doug Duncan: 14:01

I don't think so, and I think it's there's a couple of couple of reasons. One is, it's hard to see a household that holds that loan to maturity, given the dynamics of our economy. Second one is, it's hard to see an investor who really can looks that far ahead that they would be calculating a prepayment rate that would probably not be too different from a 30 year anyway. So it's not clear that you'd get a lot of benefit, but the interest charges to the household of having to pay that extra 10 years because you pay some of that upfront, right? Yeah, it doesn't to me. I don't think we'll see it.

Craig Evans: 14:47

Well, I told the two people that asked me that I would ask you that, so they're listening. So, you know, I want to get into, to one of the things that we've talked a little bit about that is keeping some of the supply, or the, I'm sorry, the home prices high, supply. You know, we're starting to see supply moving. I'm in the camp that I think one of the other things that is keeping that high, especially from a new construction side, is the energy issue. What's your thoughts through those worlds of that? Well, let me, let me clarify why I say that. Because, you know, I was having a debate probably a month and a half ago with somebody, and I asked them, as a new home builder, whether it's, I'm building, you know, three or 400 homes a year, whether we're building 30,000 homes a year, like or something like that. At the end of the day, I think people forget how many times before a piece of pipe ever shows up to that job site, how many times it's been touched by diesel fuel, how many times that two before is touched by fuel, before it ever gets to your job site, when it's as a tree to get someone to the job to cut it down, all of those things, when, you know, when we were buying fuel at $1.86 a gallon versus just shy of four, there's a big difference in the cost of what it takes to get materials to a job site to do the job.

Doug Duncan: 16:18

You bet. And if you look at the history of men and economic development the last two or two and a half centuries, the wealth growth around the planet has been far beyond all previous human endeavor, and it's based off of carbon based fuels.

Craig Evans: 16:43

Right.

Doug Duncan: 16:43

Well, natural gas, coal, is responsible for 90% of that wealth building. So the whole it's difficult to suggest that you won't see some increases in cost of that, although, 20 years ago, nobody knew the word fracking right and silicon is based off of sand, of which there's pretty big supply around the world. So again, never say never, if it were the case that there were discovered a way to decarbonize coal. The US has hundreds of years of supply of that exactly. So I don't discount the role of technology. And ingenuity of people, but you're absolutely right, those carbon fuels, which are the part of the reason the rest of the world is not signing up to US environmental standards is we're poor, so you've become rich, and we should be concerned about pollution, right? I mean, you know, just from a sort of a simple human perspective, it doesn't mean we shouldn't care about the environment, right? Grew up on a farm, and as you did as well. And what you know is the land determines your outcome, so you take care of it.

Craig Evans: 18:16

Right.

Doug Duncan: 18:18

But that those are, those are the facts.

Craig Evans: 18:23

Well, and I just think there's so many, so often, especially as a home builder, and, you know, got a group of men here, a group of people that we meet with, that we discuss, we talk about a lot of these things. You know, we're all in the building industry and it, yeah, I find it interesting that everybody wants to talk about the supply issue is one of the biggest things that's keeping the prices high. And so many people think we're getting rich on the back of stuff. And, you know, trying to go through and show people it's like, listen, we're, we're losing one or 2% of a margin. Even though prices are higher, margins are down some because, you know, because of some cost of fuel to get stuff.

Doug Duncan: 19:08

Yeah, the it's, it's one of the things that's behind the current discussion of the rise in insurance costs is the replacement is more expensive, that's right. So that's an issue here in southwest Florida, for sure, and it', we think of the 30 year fixed rate mortgage as fixing your payment. What does for principal and interest, but when property taxes go up and your insurances go up, the whole payment goes up. That's right, and so it's a more broad based issue.

Craig Evans: 19:46

So migration and immigration have always been some, some big economic stimulators. California, you know, they're losing the migration war for the for the biggest part, Florida, Texas, North. Carolina have been the biggest winners over the last three years. And I say that about California, I know there's a few markets that are actually seeing some net zero returns on migration, so to speak. What do you think is the biggest factor that makes people want to leave a state?

Doug Duncan: 20:20

It's pretty hard to argue against tax and regulatory policy for businesses as being a factor. And you know, even Phil Mickelson realized it was perhaps to his advantage to live in Florida relative to California. So yeah, I mean, businesses are in the business to make money as they should be, and that's if they do, then they hire people, and those people have incomes that can support their families, so that there's shouldn't be any shame about that. It should be some pride about that. So you you've seen, in general, more business friendly policies, tax and regulatory policies across the south, which is part of the reason that has grown such as it has. And I know there's some high profile folks that move here or there and get into the headlines, but you can also see it in just in the general population growth. I was in Dallas recently. I did my doctorate at Tech, A&M. I graduated from there in 1989 I'd say Dallas is nothing like it was in 1989 it is mind boggling, but that's a business environment, right? And it's intentional.

Craig Evans: 21:45

Yep. Well, so I know we, I know you've been with us a while, and you so I want to, just before we kind of wrap up, I want to talk a little bit about homeownership events, okay? So, you know, I do what I do because I believe in the American dream. I believe in, you know, our mantras we build for. You know, the affordability for the workforce. You know, that's, that's who we really build for. I believe, as you said, that got you into what you do, that everybody deserves a roof over their head. So as we start looking at that, you know, right now, we've got boomers have the highest home ownership rate of all the generations, mostly because, you know, when they became owners, it didn't take 50 to 60% of their income to own a home. I know we talked about Gen X, and I've started to look all the way up through generation alpha and kind of where things are at. And, you know, the alpha's still got a ways to go before they're looking at home ownership. But are you concerned that younger generations? Are you concerned about younger generations being able to afford housing? Or you think they're destined to have to buy houses or homes later in their lives, simply because they got to pay off student debts, they've gotta do all these things, and they've gotta simply just, hey, we've gotta save up X amount of money to get in the ball game before we can even play ball here.

Doug Duncan: 23:11

Well, there are some misunderstandings about what's required, and we've got a study that we're repeating, a study that we did, I think, five years ago, to see how things have changed. We're not probably our CEO will talk about that in sometime in July. And so some people have hurdles in their head which don't actually exist. So back five years ago, when we asked, How much money do you have to pay down and people at between 10 and 20% were like, well, if you can, there's some benefits but that's actually not true. We'll see where that number is today, so that would be a first thing. Second thing is, part of the reason interest rates are as high as they are is because we had some policies that generated inflation, but another part of it is because we have a fiscal policy that's generating a lot of debt that has to be financed, and that's putting upward pressure on rates too. So part of that the affordability is we can work on that and improve it. And I do think when the Fed gets to their 2% target, they're comfortable with that, they will ease, but they're not going to go back down to 3% so that's a challenge. Then the question is, what are we doing from a policy perspective to accentuate growth? Is that we, I went through the, you know, house price, interest rates and incomes, right? So what are we doing in terms of policy, as opposed to transferring income, creating income, through a set of policies related to growth when I when I bought my first house, I was not that unusual. I bought it at 40 I would say at that time, probably the average first time I ever might have been around 35 right now it's 34 I think, and rates are not too far from where they were at that time. So the first time homeowners got a little bit older over the last two or three years because of that rise in rates and house prices reducing affordability. So they've had to save longer. So it feels rough, but we've been here before, right? And we just need to put the policies in place that brought rates back down the last time. So I don't think it's a lost cause. The student debt thing is a little bit oversold. The most people aren't ready to buy a house until they've defeased most of that debt if they've been paying it. And of course, the government's administration have been forgiving pieces of it as well. No comment there.

Craig Evans: 26:11

Give them a...

Doug Duncan: 26:12

Yeah, so it's not unrealistic. It just may take longer.

Craig Evans: 26:18

Yeah.

Doug Duncan: 26:19

What I would say, and policy can have an impact.

Craig Evans: 26:24

You know, when I look historically over stuff, you know, we're averaging anywhere between five to 7 million sales transactions a year in the United States, let's compare the two, especially with because of The Norris group, you know, and The listeners are listening to us, you know, we've we focus a lot in California and in Florida. So we've got five to 7 million as a annual average in that number there from sales transactions. California usually is seeing about 500,000 transactions a year. They're down to about 260 right now. Florida is down to about 282 right now. So both states are down. Florida is not down as dramatically as California. Do you think that the rest of the United States will start to perform in the aspect of from a ratio perspective, more like a Florida or California?

Doug Duncan: 27:35

Well...

Craig Evans: 27:37

And I think a lot of that still comes back to an affordability issue. You may dive in and say, well, there's a lot of other aspects that I'm missing.

Doug Duncan: 27:44

I would add one other aspect, and that is post covid. Do you believe that the proper comparatives are the pre covid state of nature. So here's what I mean. The day that you told your workers you can work from home, you gave them a real pay increase, the Fed drove interest rates to lifetime lows, and they could decide to move to areas distant from where they work to escape the threat of concentrated population. If you ask them to come back, you're giving them a pay cut, and then you might lose them if they've got other opportunities to where to the in the geography where they relocated and so but you as the employer, still had facilities that you were either leasing or you owned where they worked. So now you've got to make a decision, is their productivity as good or better than it was when they were coming to the office every day, such that it merits the pay that they're getting and allows you to defuse the cost of the facilities for which you have ownership or contract. I don't think we know the answer on the productivity piece yet. I think that's still to be determined. I think in some cases it will. It might even be better. In other cases, not. So I don't, I've asked my staff, is it do, do you think we should really be comparing to 2019 Well, that's the year before the covid true. But did the covid change any fundamental relationships, at least in the intermediate term, maybe not permanently, because I do believe people come back to cities once they're comfortable that we understand the disease or any other that might emerge. That's like that, because there are productivity benefits, both to employees and to employers, of having a rich pool of nearby labor, right? And you get that in a city, right? So I don't think my personal view is, as long as the governance of the cities keeps crime down and keeps the business environment strong, there will be a city center and metropolitan areas, so.

Craig Evans: 30:17

That's a big enough challenge for a lot of our

Doug Duncan: 30:19

And it is, absolutely, I so I but in the cities, right? intermediate term, I think we'll still see like we we don't require anyone to come to the office, except there's a very limited staff that are designated fully in office. But we encourage people to come, and lots of particularly younger people, and then it's the ones that have like teenagers, or say, upper grade school and teenagers at home that find being able to work at home advantageous young singles or come to the office. Those of us who are empty nesters come to the office. It's sort of that middle group that's a little more challenge.

Craig Evans: 31:02

So I got two questions, if I can, I'll ask you, and then we'll wrap up. So you talked a little bit about you growing up and lack of plumbing, the whole process, right? So, and this is, you know, so many of the people that I interview, we do a lot of talking about who you are, what's your background, what got you into this? A lot of trying to get our audience to know who you are and what brought you into this culture, what we do, we glossed over a little bit of that because you're Doug Duncan, you hold a position that a lot of people want to know, what you think, and so I wanted to get more into to very specific stuff. But what I'd like to know is, what does home ownership mean to you personally?

Doug Duncan: 32:00

Several things. One is, it's some measure of success. You've been able to work hard, save, make a purchase, that where you have some ownership and stability. Second, it's a place to have a family. And it's third I believe strongly in property rights and it, and I think it's evidence that you have a place. Not everyone feels that way about it, but there is an element of independence in the American psyche, which owning your own home tweaks that element of independence. I own this house, I can invite people over here to my house and aspire to share with them some of the benefits of the successes that I've had in this space. So it means that to me, I grew up on a farm, as we mentioned a couple times, and it was the same thing from my Dad in looking out over the farm and taking care of it, feeling proud about, you know, watch the corn grow as long as he didn't let me cultivate it, because he was always where about half of the row was gone because I fell asleep or something. But there's a significant sense of pride, and well deserved sense of pride for households that are able to achieve that. And like to say not everyone desires that. There's different ways you can tweak that, but that's part of what it is.

Craig Evans: 33:47

So last question I you know, I know where I stand from a political perspective, right? Not going to ask you who you're voting for but as far as the housing market goes. Do you think it really matters who wins the presidency in November? Is one option better than the other coming down the pipe here?

Doug Duncan: 34:12

So I'll see if I can help fill the seats in the Supreme Court observers section. So I believe strongly that property rights are the bedrock of what makes our system work. So every time that I'm aware of a property rights case being before the Supreme Court, I go and sit in and listen to the arguments. Now, though our arguments may be only 10% of the decision. But it's really interesting to hear how the discussion in that branch of our government goes about the issue of property rights, because one of the reason, in my view, that prices are, aren't, maybe less stable than they should be, or potentially higher than they should be, is because, as we've sort of chipped away at the elements of your property rights, it increases the variability around that price.

Craig Evans: 35:19

Right.

Doug Duncan: 35:19

And raises risk premiums associated with it. So I would have to say that part of what's going on in housing is an erosion of property rights. It's part of the reason that HOAs get a lot of heat is, you know, you're telling me what I can and can't do. I paid for this property and, you know, so you can kind of see that. So I'd encourage if you've never gone to a supreme court hearing, if they have one on property rights, go. You can sit in there's no charge or anything. You just get in line.

Craig Evans: 35:51

I know where I'm scheduling my next trip.

Doug Duncan: 35:53

I've been to five and really fascinating. It is really fascinating.

Craig Evans: 35:57

That's amazing. Well, Doug, I thank you for your time, and I thank you for your insight into everything with housing, and I know our audience has been elated to hear all of what you have to say.

Doug Duncan: 36:08

Great to be here. Thanks for the invitation.

Craig Evans: 36:10

Absolutely. Everybody. Thanks so much for being with us. Take care. We'll see you soon.

Doug Duncan: 36:15

All right, yeah, you bet.

Craig Evans: 36:16

Absolutely.

Narrator: 36:18

For more information on hard money loans, trust deed investing, and upcoming events with The Norris group. Check out thenorrisgroup.com. For more information on passive investing through the DBL Capital Real Estate Investment Fund, please visit dblapital.com.

Joey Romero: 36:37

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.