Residential Magazine

Doug Duncan, Fannie Mae

Housing is expected to be a strength of U.S. economy

By Jim Davis

[Editor’s note: This article was first published March 1 from an interview that occurred in January. Information contained in the piece relates to events before the ongoing coronavirus pandemic.]

Fannie Mae projects that the economy will grow between 2% and 2.5% this year, bolstered by rising sales of new and existing homes and a surge in new-home construction. That’s a sustainable, noninflationary expansion that should result in a good year for the mortgage industry, said Doug Duncan, Fannie Mae’s chief economist.

“Not surprising,” Duncan said. “It’s a presidential election year and nobody likes big surprises, especially not those running for office on either side of the ledger.” Duncan spoke to Scotsman Guide about the overall direction of the economy, where housing fits into the puzzle and what the election could mean for housing dynamics.

Housing scarcity is a major issue facing the market. Why is it happening?

The rise in residential fixed investment is evidence of the fact that demand has grown faster than supply. So, builders are responding. You can see that in our estimates, and the recent data on housing starts and permits. Our expectations are total housing starts will be up just under 7% in 2020 and still another 4.5% in 2021.

Why hasn’t more construction been occurring?

For one thing, they are gradually training skilled workers. If you think about when the market started to grow back in 2012, if you were a brand-new employee, you now have seven years of experience. They are able to increase production, but it’s only as fast as they can acquire a skilled laborer.

The demand is there. Adult children living at home with their parents is still at near all-time highs. The peak of millennials, in terms of growth as a population group, won’t happen for another six years. To the extent that builders keep expanding supply, the demand will be there to meet it.

Will millennials and Gen Zers be able to overcome affordability challenges?

It’s still going to be a challenge in that it’s created by the supply issue. It’s not an interest rate problem. Interest rates are extremely low. The long-term average over a 70-year time period for a 30-year fixed-rate mortgage is about 6%. Right now, they are between 3.5% and 3.75%. It has been much more house-price appreciation that has been the issue.

There had been concerns about a recession or a growth recession. Do you see that happening?

We do not. If you go back two or three years before the [Tax Cuts and Jobs Act of 2017], and there were government shutdowns and things like that, that created a lot of uncertainty. We were one of those that expressed some concerns about the potential of recession, but those risks have been well managed.

Despite the economy’s health, the U.S. is still borrowing $1 trillion this year. Is that going to cause problems?

Eventually, bills have to be paid and, in relative peacetime, we’ve never run this level of federal debt relative to our economic growth. At some point, you have to wonder if investors won’t say, ‘Well, maybe the U.S. Treasurys are not 100% risk free.’ If that day comes, then you would expect risk premiums to rise and interest rates to rise with them. So, I do worry about it.

How much of a concern is global turmoil such as the hostilities with Iran earlier this year?

I think there’s always geopolitical risks. Neither Iran nor we want to undertake a war with each other and it’s not in either of our interests for that. Oil as a weapon is not what it once was because of the United States’ frackers, so there isn’t the leverage in that space that there used to be for some of the players in the Middle East.

How much bearing, if any, do you believe the election will have on the economy?

It depends entirely upon the policy priorities of whoever is elected. If the president is reelected, we know what his policy priorities are and they are built into expectations — with the exception, potentially, of what will happen on the tariff front and to the extent that there are expiring provisions of the tax bill.

If he is not elected, the question is, what are the policy priorities of who is elected? If you’ve got things like free university education, forgiveness of student debt and wealth taxes, those things have much more fundamental potential to change the direction of economic activity. The market will probably start to signal what they think within the October [2020] time frame in terms of the odds.


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