The "new normal" – Doug Duncan’s mortgage industry outlook

Fannie Mae's chief economist less bullish about housing market’s prospects in 2022

The "new normal" – Doug Duncan’s mortgage industry outlook

If 2021 was a great year for the US housing market, 2022 faces “a new normal” marked by a slowing down of home price rises, job layoffs in the mortgage industry, and concerns over rising inflation and interest rate hikes, according to Douglas Duncan (pictured), Fannie Mae’s senior vice president and chief economist.

Duncan said “a shift” was underway in the market and the wider economy, which would result in far more moderate home price appreciation, expected to be between 7% and 7.5% this year due to the ending of fiscal and monetary stimulus.

“One of the elements of the shift is that you’re going to see house prices up, but not nearly as far as they were in the last two years because that was driven hugely by the fiscal and monetary stimulus (now) being removed,” he told MPA.

Ominously, he added that low interest rates “may never be seen again”.

Read more: Fannie Mae’s Douglas Duncan bullish on home market prospects

Asked if mortgage professionals should be more concerned about inflation than rate hikes, Duncan cited historical data to explain the relationship between the two. He said: “The reason interest rates were that high back in the late 1970s and early ‘80s was inflation,” he said.

“Rising interest rates in and of themselves are not a big problem if household incomes are rising as well. But if they rise rapidly, and by a significant amount, household incomes don’t adjust that fast and the housing market takes a hit. They definitely should be concerned about inflation in the long term, because that eats away at people’s purchasing power.”

He said the concern was that mortgage rates had run up 45 basis points in the last month. “That’s kind of a shock, and there’ll be an adjustment somewhere in the next year,” he warned.

Duncan predicted both the number of first-time home buyers and cash purchases to slow down during the course of the year.

“The share of first-time homebuyers will slow,” he said. “We can see debt to income ratios are starting to rise a bit, which typically shows that they have less cash available for down payments.”

The comments will come as a blow to this group of buyers, who last year were already being squeezed out by cash investors, bidding wars and low inventory.

On a more positive note, the lack of inventory would in part counteract the slowdown in demand for homes.

“Demographics are still positive, in that the millennials are not done buying homes. Demand will still be there, moderated by the rise in prices and in the rise in interest rates.

“(But) we don’t see massive volumes of existing homes coming on the market anytime soon because the boomers have said (they) intend to age in place.”

Duncan, however, poured cold water on suggestions that the high level of equity among borrowers – which he estimated to be as much as $2.5 trillion - would offset inflationary pressures and rising interest rates.

He said: “The level of savings which households have accumulated is above what would have been anticipated pre-pandemic - they still have a lot of cash - but that’s going to burn off as consumption continues and the savings rate is back down to more normal levels.”

Read more: Wholesale lender lays off 348 workers

In response to the news that Texas-based Stearns Lending LLC will be laying off 348 workers by the end of January, Duncan said it was “evidence of competitive pressure” as volumes fell, adding that “significant layoffs” tend to happen halfway through the year after a turn in the market. 

“These are early indicators, and I would suggest you will see more of that coming,” he added.

Duncan also noted that Fannie Mae had detected a shift in homebuying trends, with people continuing to move to less populated areas.

He said: “The degree to which that trend continues will in part be revealed by what we learn about businesses’ tolerance for remote work. And that’s another element of the discussion that will continue for the next couple of years.”

Duncan’s “new normal” – main points:

  • Pace of home price rises to slow to between 7% and 7.5% this year.
  • Concerns over inflation and rates rises – low interest rates “may never be seen again”.
  • Demand for homes to continue, but pace will moderate amid price increases, rate hikes and home shortage crisis.
  • Households expected to “burn off” $2.5 trillion in equity.
  • Industry layoffs to continue amid competitive market pressures.
  • Homebuyers to continue moving to less populated areas, dictated by WFH practices.

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