Residential Magazine

Q&A: Doug Duncan, Fannie Mae

Home prices could slide 10% in a two-year period

By Jim Davis

The home price correction is already underway nationwide and is expected to continue through next year, according to Fannie Mae chief economist Doug Duncan. U.S. home prices are expected to drop by about 10% from July 2022 through June 2024, Duncan said.

“That will vary by market,” Duncan said. “Of course, home prices went up by 40% or thereabouts over the prior couple of years.”

“Who’s going to hold mortgage debt? Not on the consumer side but on the investor side.”

This means that most homeowners won’t lose much of their built-up equity, Duncan said. Even some people who purchased more recently managed to lock in low interest rates at 2.5% to 3%. Duncan spoke to Scotsman Guide about the factors that could get homeowners to give up such favorable mortgage rates on their homes, the purchase market outlook for this summer and whether he expects a recession.

What do you expect the purchase market will look like by this summer?

You’ve seen the markets really trying to get a handle on what (Federal Reserve) Chairman (Jerome) Powell is saying about the inflation fight. And as we’ve expected, that is driving rates upward, which will constrain affordability and therefore sales. We have projected in the second quarter of 2023 total (annualized) home sales of 4.6 million, about 600,000 new and about 4 million existing, then just barely above that in the third quarter.

What’s the biggest headwind for buyers — interest rates, prices or lack of inventory?

All three. When you combine the fact that interest rates have risen significantly with already rising house prices, income simply can’t keep up to that. The house price increase was driven by the supply issue that you referenced.

You firmly fall into the camp of a mild recession rather than a soft landing, right?

We do and have been there for quite some time. We now believe (a recession will occur) somewhere in the middle of the year. Our current thinking now is that we will have a milder recession. Interestingly, the market is still coming to terms with the seriousness of Chair Powell’s statements about “higher for longer,” and that has led a group of knowledgeable economists to think there is the potential of a hard landing.

You expect the Fed to continue to be aggressive on interest rates, right?

We’re taking them at their word. We think that there will probably be quarter-point increases at the next three meetings (March, May and July), and then they’ll stay there through the rest of 2023 into 2024.

Is this a more murky than usual climate to make an economic forecast?

Yes. I’ve never forecast before in the presence or aftermath of a pandemic. And there’s just a whole bunch of things in behaviors that changed, and we don’t know which changed permanently and which changed temporarily.

What can get homeowners to give up their once-in-a-generation interest rates?

If they have a job requirement to move from one place to another. Maybe they’re thinking about retiring. There are other life-changing events like death and divorce and things like that. The other thing that can happen, of course, is if you’re moving because you need a bigger house for your family, you might keep that home because the low carrying cost of that matched against market rents actually makes you money holding (the first home).

Is the solution to the inventory crunch more building or something else?

The boomers have continued to do what they have said they were going to do, which is age in place. Until you get a significant turnover among the boomers (exiting the housing market), it’s going to be on the back of the builders to increase the supply.

What question do you never get asked that you would ask yourself?

Who’s going to hold mortgage debt? Not on the consumer side but on the investor side. We went from the thrift industry holding the biggest bulk of mortgage credit, to the GSEs holding it, to the Fed holding the biggest bulk of mortgage credit. And the Fed wants to exit. So, who’s next? The reason that matters to consumers is it will say something about where interest rates will be in the longer term and how volatile they will be. ●


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