With 2020 halfway in the books as the country continues to wind its way through the coronavirus crisis, Fannie Mae’s mid-year outlook projects a gradual recovery.

The government-sponsored enterprise anticipates a U.S. economy that’s between 4 and 5% smaller at the end of 2020 than closing the year prior, with economic output not rebounding to 2019 levels until likely 2022.

Fannie expects that the low interest rate environment will generate about $1.9 trillion refinances this year and another $1.1 trillion in 2021, along with $1.25 trillion in purchase mortgages this year and $1.3 trillion the year after. Existing-home sales, Fannie projects, will fall 11% lower than they were in 2019, while new-home sales will be about 2.5% less.

Scotsman Guide spoke with Doug Duncan, Fannie Mae senior vice president and chief economist, about the challenges of forecasting the future in the age of COVID-19, the particular market factors to watch and the sustainability of the sales rebound in the short-term.

Scotsman Guide: We’ve seen forecasts fluctuate so much, it seems, since the start of the pandemic. That jitter seems to have calmed quite a bit now, with this outlook not shifting too dramatically from Fannie’s forecast last month. With cases now rising again in some parts of the country and governments reacting in kind, how confident can we be in projecting numbers moving forward? 

Doug Duncan: Of course, at the end of the day, the real issue in any forecast is that it’s primarily these days a scenario. The difference between that scenario and a forecast is the degree of uncertainty around the base case. And the degree of uncertainty around this base case is still much higher, simply because the source of the economic disruption is something that’s still not well-understood, and it’s not economic in nature. It has economic impacts, but it’s not economic nature in nature. It’s fear. Fear of a virus, and a virus which is not well-understood, even by the medical research and scientific community, much less by the public. That fear has led to a retraction of discretionary spending by middle- and higher-income households, and that retraction in discretionary spending has had a couple of impacts.

So looking forward, the question is, how realistic is that base scenario? Part of it depends again on the response of people to the continuing information about the virus, its incidents, severity and duration, as well as any treatments or vaccines that could emerge to deal with it. Huge uncertainty there, even within the medical community.

So could the forecast be wrong to the downside? It could. One of the big risks right now is that, with the expiration of the $600-per-week supplementary unemployment insurance, if there’s not significant recovery in employment for the hourly wage earners and the businesses that are hiring them, then those businesses could get into greater trouble. They could end up having to lay off salary workers who are more likely to be homeowners, and that could bleed over into the mortgage credit space.

SG: Are there any particular indicators or market dynamics that you’re keeping a close eye on to gauge the true sustainability of the housing market’s resilience?

DD: We survey a thousand households a month, and we’ve been doing that since June of 2010, so now, we have a 10-year time series. We have a set of staple questions that we have asked throughout. One of the things that we noticed during this [pandemic] was that the change in the response of “Is it a good/bad time to sell a house?” was greater than the change when we ask, “Is it a good/bad time to buy a house?” Those who’d said it’s a bad time to sell a house increased more than those who said it’s a bad time to buy a house. There’s two things going on there.

One is, if you’re afraid that somebody is going to come to your house to look at it, potentially to buy it but also bring the COVID virus, you’re not going to like that idea very much. Or you may think no one will come because of the virus if you were to list your house. You might have to take a price discount, so that’s also not a very good outcome.

On the other hand, if you’re thinking about buying, yes, the economy has slowed down and there are some concerns about that. But if you feel your job is secure, interest rates are at historically low levels. That would be a better time to buy a house. So what happened because of these two things was that supply fell further than demand, and now, house prices actually are rising, even though the total level of sales has fallen. So we’re certainly watching that. If those dynamics change and if people’s sentiments change, there could certainly be some impact.

SG: We’re seeing quite a bit of activity in the sales numbers now suggesting that some people who played it safe during the usual spring buying season have started to make their moves in the summer. Are you guys at Fannie seeing any big indications yet that strong buyer activity could carry over into the fall?

DD: Well, the seasonal displacement [so far] is more about people who are moving during the summer to get their kids pre-positioned for school. To the extent that more schools are announcing online learning, that’s an interesting question. I don’t know yet if that will impact people’s thoughts on whether to buy and move now or to stay where they are because of this online learning piece. 

But certainly a lot of the business that we’re seeing right now is pent-up demand from the April-May timeframe working its way through the system. Whether that carries forward into the fall, it’s possible. But I would expect that if it’s possible to push the mortgage and the move through before the fall, I think people will try to do that. We are certainly are seeing volumes that suggest that that’s under way, and we’ll be watching to see if it continues into the fall months.