Where America’s Most Accurate Forecaster Sees Home Prices in 2024

Dave:
Hello, everyone and welcome to On the Market. I’m your host, Dave Meyer, and today I am going to be interviewing Doug Duncan, who is the senior Vice President and chief economist at Fannie Mae. This is an awesome interview. I think if you listen to this show, you know that we talk a lot about data, but we’re always looking at other people’s data, at other people’s forecasts, whether it’s Zillow or CoreLogic. Having someone like Doug who literally runs the team at Fannie Mae who predicts what’s going on in the housing market is such a treat ’cause we can really learn a lot about what his process is and what different variables he’s considering when he does these analyses. Now, if you are skeptical about forecast, you should know that Doug and his team actually won an award for forecasting accuracy for the housing market over the last couple of years.
So if you want to listen to any forecast, Doug literally has won the award for the most accurate housing market forecast over the last couple of years, and he does a great job explaining what goes into it. So in the interview we talk a little bit about how his team and he develops this methodology, which I know data analytics people like me really love that, but it’s important to listen to because you can take people at their face value. But when you hear Doug explain his thinking and how he weighs different variables, I think it lends a lot of credibility to the forecast itself.
Then we talk about the actual forecast out two years, what he thinks is going to happen throughout 2023 and into 2024. I’ll give you a little teaser. We also talk about why Doug thinks that the housing market is going to behave in an unusual way all the way out until 2027. So he’s forecasting four years down the road, and obviously he doesn’t know the exact numbers, but he does a great job explaining the various variables and influences that are at play that are going to be impacting our industry for the foreseeable future. So buckle up for this one. It’s an awesome interview. We’re going to take a quick break, and then we’ll bring on Doug Duncan from Fannie Mae. Doug Duncan, welcome to On the Market. Thanks for joining us.

Doug:
Good morning. Glad to be here.

Dave:
Let’s start with just having you introduce yourself to our audience. Can you just tell us a little bit about your background in economics and real estate?

Doug:
Yeah, actually, most of my career has been in real estate. After I finished my doctorate, I came and worked in Washington for the Department of Agriculture for a couple of years, but then went to the Hill, worked on the House Banking Committee for a little bit and was hired away from there by the Mortgage Bankers Association where I worked for 15 years and eventually became the chief economist for the last seven of that. Then when the chief economist at Fannie Mae left, they recruited me to come to Fannie Mae. So I’ve been here about 15 years. I didn’t start out to be a housing kind of person, but it’s a human story. Every human in the world puts their head down on a piece of real estate somewhere every night. It could be any kind of quality or location, but it’s part of the human story. It makes it interesting. I’ve just enjoyed working in that space.

Dave:
Yeah, I totally agree. The human element does really make it very, very interesting, and you’ve clearly become very good at it. We are very excited to have you here because we do a lot of speculation on the show, and we look at data like yours and talk about what it might mean, but don’t maintain our own models or do any of our own forecasting. So we’re very excited to have you here who does your own forecasting. Can you just tell us a little bit about the forecasting that you do and the models that you create at Fannie Mae?

Doug:
Sure, actually, it’s a team effort. One of the things that I’ve tried to do is in a controlled way to expand the amount of data that we use in drawing the conclusions about where things are going to go. So we do use a model, but my personal view is one of the flaws in any macroeconomic model is the assumption of equilibrium, which there’s never actually… in the real world, there’s not no such thing as equilibrium because as soon as the next trade is made, things are different. But we use that as a way of starting to organize our thinking. So we have a model that we use, but we do a lot of work outside the model to draw in other information because you can’t get everything into the model. A lot of it is just thinking about things. So for example, after the great financial crisis, none of the models forecasting housing activity work were performing well.
So we just stepped outside and we said, “Well, let’s think about what you have to do to build a house, and the first thing you have to do to build a house, you have to have a piece of land.” So we started calling around to people that invest in land and asked them, “What are you doing?” They were saying, “Well, we haven’t bought anything because there’s all this foreclosure stuff going on,” and all that has to be fixed before we start buying land. Well, it’s three years from the time that you buy a piece of land until you’re starting the permitting process for development, and then that can take a while and then it’s another nine months or a year before you actually get the house. So that led us to say in 2014, “Look, the problem’s going to be supply because the construction of supply is way behind.” Turns out that was true. So then that informed the model and our modeling work has done better. I think you noted that the team had won the Lawrence Klein Forecast Award. I’m from the Midwest and you’re not allowed to brag in the Midwest.

Dave:
We could brag for you. You did win-

Doug:
Okay.

Dave:
… an award, a prestigious award for accuracy in forecasting, so we’ll do it for you.

Doug:
Well, the one reason I do mention that is that award is a four-year look back on your forecast. So it’s not just the most recent time period, but this one in this case includes the pandemic. So that, to me, was meaningful because we spent a lot of time not with the mathematical models, but thinking about people ’cause this was a healthcare issue, and so how are people going to respond. Then based on how people are going to respond, what are businesses going to do? In the interim, what are policymakers going to do? None of that one’s captured in a model anywhere.

Dave:
I want to talk about your forecast in just a moment, but we see… I look at a lot of this data and look at all these different forecasts. We also hear a lot about some of the operational errors from some of these quote, unquote, “iBuyers” who have not been able to nail the forecasting and modeling. Do you think that’s the main culprit here, is relying too much on just the math and the algorithms here and not enough on intuition and some of that more qualitative research?

Doug:
It’s probably an issue of balance because the reason we do use models is they give you a framework for thinking, and then we use judgment because things are never the same as they were in the past in every aspect. So you have to think about which things have changed in ways that might not be fully understood. So I’ll give you a current example. In July of 2022, the Fed tightening really got to the market and there was a big drop-off in activity from the significant run-up in mortgage rates. So we and others all forecast a decline in house prices because we’d seen them rise something like 40% in the previous two years. Well, they did decline for a quarter or so, but then they leveled off and picked up. Why was that the case? Well, people who had existing homes were offering them for sale at historically low levels.
So people who owned a home, very low level of existing homes are available from a supply perspective. So that put the expansion of supply on the backs of the builders, and the builders were still struggling to catch up from the great financial crisis. In the meantime, there were these huge transfers of income to households, much to households that might be ready to buy, and that’s juice demand more than we anticipated as an offset to that rise in interest rates. So house prices have turned, and we think this year 2023, they’re actually going to go up around a little less than 4%, which is not what we thought in July of 2022.

Dave:
Wow. Yeah. So you’re saying by the end of the year, basically, so for 2023 end of the year, it’ll be year-over-year plus 4% on a national level?

Doug:
Yeah, about a 4% increase. Yeah. Yeah, that’s right.

Dave:
Is that the timeframe of the model or have you forecasted beyond 2023 as well?

Doug:
No, we release publicly a two-year forecast. We actually do a bunch of other things for modeling for the company for different risk issues and things like that, but the public forecast is about a two-year forecast. So the house prices in the 2024 time period pretty close to flat in our current thinking, and we do release our price and forecast publicly. We do a quarterly forecast. We worked on trying to do a monthly forecast, but it was fairly inaccurate from our perspective and what the company uses the price forecast for is thinking about the allowance for losses.

Dave:
What about 2024 do you think will shift from a environment where we’re seeing solid growth at 4% to one that’s flat?

Doug:
We have a mild recession in our forecast at the beginning of next year. If you go back a year ago in April, we suggested that was going to occur in the third quarter. Looks like the consumer’s been stronger than we anticipated, and there’s been some other underlying strength in activity that’s going to push that out probably to the beginning of next year. That would lead to a run-up in unemployment somewhere, probably not to 5%, but somewhere close to that. If that all occurs, that would suggest some slowdown on the demand side. Mortgage rates, we don’t expect mortgage rates to go down very far during that time period.
Others have bigger declines than we do, but we’re taking the Fed at their word when they said they’re going to be higher for longer. The market’s been betting against them for quite some time and been disappointed in each period. Right now, I think the market thinks the Fed won’t raise again. I wouldn’t necessarily argue with that, but they have the Fed starting to cut in the first quarter of next year. We’ll see about that. Today’s inflation numbers don’t really change that picture much, but I think that’s where we think rates will be a little higher than some folks think a little bit longer.

Dave:
Yeah, it does just seem like the more evidence that the higher for longer narrative feels more concrete, that there’s more certainty in that, and mortgage rates are not likely to come down unless, like you said, if there is a big uptick in unemployment that could change, but that does still feel a bit far out.

Doug:
You have some things that are keeping the spreads of mortgage interest rates over, for example, Treasury rates pretty wide. You did see, going back to that July time period last year going into the fall, mortgage rates peaked at about 7.1% and all of a sudden, you saw things popping up like 2-1 buy downs. So that’s an interest rate where you get a discounted interest rate for two years and for one year it’s less of a discount, then it comes back to a market rate. The reason that happened was in the capital markets, mortgage-backed securities investors were uninterested in a security backed by 7% mortgages thinking that the federal cut rates and all those loans will prepay and that MBS goes away.

Dave:
Interesting.

Doug:
So there is a part of the reason that for that spread being wide is some expectation that at some point the Fed’s going to start easing and some of those loans are going to refinance. There’s also the question of risk. If there is a mild recession, it means that some unemployment will occur and that could lead into a reduction in performance of some of those securities due to delinquency or that kind of thing. There’s also the fact that the Fed is continuing to run off its portfolio. It’s no longer a buyer, and so someone has to step in and replace the Fed. So there’s a variety of reasons why those spreads might be wider today. It might continue to be wider going into next year.

Dave:
I’m curious, though, because of that, one stat that always just sticks out in my mind is some of these indices of affordability. We’re at this point by some measures that affordability is at a 30-year low, 40-year low, something like that. If housing prices are going to go up a bit this year, stay flat next year, mortgage rates are going to stay elevated. How does this affordability issue work itself out if it does at all?

Doug:
Well, if you take apart some historical relationships and think about where they are today, but we have results in a chart that I have affectionately called the barbwire chart.

Dave:
That doesn’t sound very nice.

Doug:
Well, I grew up on a farm, and I had to manage some barbwire. It’s not a pleasant experience.

Dave:
I can’t imagine.

Doug:
So in time it makes sense that a household of a certain income can roughly afford a house at a certain price. So there’s a long-term stable relationship between income and house prices. Then that relationship can be moderated or modulated by interest rates. If you have to borrow money to buy the house, the higher the interest rate, the lower the price will be relative to your income. As interest rates fall, you can afford to pay more price relative to your income. So that’s a pretty common sense kind of a relationship. That relationship is very stable all the way from the early 1980s out until 2001. In economic indicators, incredibly stable. Then you saw the bubble, then you saw the burst of the bubble. Then from about 2014 to about 2020, it was right back on that relationship, to 2019, I should have said.
Then in ’20, we had COVID and that the combination of the lack of supply, the things like the PPP, the income transfers to salaried workers, which is where most of the home buyers are, all that really juice demand at a time when the builders had actually stopped increasing supply because they weren’t sure what 20 million job losses, who’s going to buy a house? So they actually stopped building for a little bit. They were also worried about their staff and the help of their staff. So they got further behind all of that juiced prices.
If you look at that relationship, we are still from a price relative to that long-term history relationship significantly above that level. So what has to happen? Well, either interest rates have to come down or house prices come down, or incomes go up or supply increases or some combination of those four things, that’s what I would be watching is, what are those four things doing in concert to one another to get us back to that long-term relationship, which is very predictable. So that’s what we’re looking at these days.

Dave:
Do you have any thoughts on what combination of those four variables might do it?

Doug:
Well, we think that if the Fed gets inflation under control, that means real incomes will probably strengthen. There will ultimately, if the inflation is under control, the Fed will ease interest rates. The builders are building but not faster than what demographics are increasing demand. So on the supply side, it would’ve to be that existing homeowners wouldn’t be willing to offer their home for sale, although most of that is actually just churn. Because unless you’re selling a house and then moving into an apartment, you’re not adding to supply for purchase borrowers, right?

Dave:
Mm-hmm.

Doug:
So it really is more on the builder front and it’s hard to see that prices come down very rapidly. Although in a recession, depending on the depth of the recession, they may come down some. So I think more so it’s about interest rates and incomes than it is about the supply side or house prices.

Dave:
That makes sense. It sounds like your base case here is that it’ll probably take a little while for this issue to resolve itself.

Doug:
Yeah. If we look at the barbwire chart, it suggests, given our total economic forecast, 2027, it would come back into alignment.

Dave:
Oh, my God. Okay. Wow.

Doug:
Yeah, it’s a little ways to go.

Dave:
Just to be clear, you see prices being relatively stable during that time. Meanwhile, real wage increase and affordability chipping away at the inaffordability problem.

Doug:
Then demographics will ease things a little bit. The peak home buying age for the millennials is three or four years off, so the demographic push will also ease a bit then.

Dave:
Do you have any thought thoughts on how that might play out just in the whole economy? It just seems like there’s this huge bottleneck with affordability and the housing. Obviously, that impacts our audience and people who are in the real estate industry. But do you think that this issue where people are having a hard time affording houses could have secondary impacts on the broader economy?

Doug:
Well, interestingly, the homeownership rate nationally is pretty close to its sustainable level. So that is the ownership spree is around 65%, which if you just do a simple exercise, you think about people that are really in the older stages of life are going to need some assistance. So they may exit homes into senior living facilities and things like that, so there’s a share of the population that would exit ownership at that end. There’s a group of people who simply don’t want to buy homes. They like living in apartments.

Dave:
Right.

Doug:
There’s a group who are financially unable to achieve homeownership, and then there’s a group that are too young to really be considered in the homeownership category. If you do that simple math, you get to where the homeownership rate is today. It’s a little bit weighted toward the boomers because their health has been better than some previous generations, and they have a high homeownership rate, so they’re holding it up at the national level. So some of those younger groups wouldn’t probably have the same homeownership rate as a previous generation might because of this affordability issue.
So the question becomes, will the boomers start to release some of that existing homeowner supply that they have, or will this group that locked in very low interest rates, two-and-a half to three-and-half-percent in the 2020 to 2022 time period, will they simply hold those and convert them into single-family rentals because they got such a low interest rate on them and actually take some supply out of the market from that perspective that they have to move and they buy another house but keep that one as a rental? It’ll be interesting to see how that piece plays out as well. So there’s challenges in the days ahead.

Dave:
It certainly sounds like it. Given that one of Fannie Mae’s missions is to spread equitable access to affordable housing, do you have any thoughts or advice for people who do want to get into that housing market but are struggling with prices and interest rates where they are?

Doug:
Well, I’ll say the same thing I’ve said for 25 years, because I just think it is basic and true, that is, if you have a family budget or household budget, so I start with that phrase because you should have a household budget because the things a lender is going to ask you will come right out of that budget. They’re going to ask you anyway, so you want to be equally prepared. As the lender, it makes for a better conversation and negotiation when you’re talking about loan terms. But if you have that budget and at today’s prices and the home that you’re looking for, you can qualify to buy, then it’s a good time to buy.
If you’re betting that interest rates are going to go somewhere or pause prices are going to go somewhere, now you become a speculator. Can you afford to be a speculator? Some people can, some people can’t. But in the midst of that, really key is making sure that you have managed your credit well. If you haven’t, you can fix it. It takes discipline, but it goes back to that budget and it says, “Don’t spend outside your budget. Make sure you pay your credits on time. Show that you’re a responsible manager of financials.” All that’s going to be key to becoming a homeowner, no matter whether you are lower income or you’re higher income, it’s the same principles that apply. You always should remember you have bargaining power because the lender doesn’t make any money if they don’t make you a loan.

Dave:
Yes.

Doug:
They’re in the business of making loans, so they actually want to make you a loan. So that’s power for you as a consumer. Personally, I’ve never taken a mortgage without talking to at minimum three lenders and have always got a better deal than with the first one that I talked to.

Dave:
Well, that is good financial advice for any economic climate. That’s just good, sound advice to shop around, be organized, negotiate as well as you can, so thank you. Doug, this has been a really big help. We really appreciate you coming and joining us. If people want to learn more about you or download the forecast that you and your team produce, where should they do that?

Doug:
Fannie mae.com, F-A-N-N-I-E-M-A-E.com. All the research and things that we talk about in our forecast, including the forecast and a commentary on the forecast is available free on the website. We don’t have a charging thing. We have a public mission, and so we try to make lots of information available to the public and to people in the industry.

Dave:
That’s great. Well, thank you so much, Doug. We really appreciate you joining us.

Doug:
It’s a pleasure. Good to join you.

Dave:
Another big thanks to Doug Duncan, who is the senior vice president and chief economist at Fannie Mae for joining us for this episode. If you like this episode, share it with a friend. Go out and maybe you have that friend who thinks that housing prices are going to crash or is scared about getting into the real estate market. Share this information that Doug, who literally wins awards for forecasting the housing market has shared with us today. Maybe it will help them understand what’s going on in the economy and make some good investing decisions for themselves. Thank you all so much for listening, and we’ll see you for the next episode of On The Market. On The Market is created by me, Dave Meyer and Kailyn Bennett, produced by Kailyn Bennett. Editing by Joel Esparza and Onyx Media. Research by Puja Gendal. Copywriting by Nate Weintraub, and a very special thanks to the entire BiggerPockets team. The content on the show On the Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.