Fannie Mae Chief Economist, Doug Duncan, was interviewed by Scotsman Guide News at the Mortgage Bankers Association annual convention and let them know what's been on his mind and the outlook for the mortgage industry.
The mortgage industry has been facing some tough times, but is there any reason to be optimistic?
The short answer is no. It's going to be difficult because rates are going up. There are multiple reasons that rates are rising. The economy is growing stronger than people had thought and that is putting pressure on rates. Also the Fed is tightening and we expect them to continue that trend. Third, the Treasury market is going to have to fund the size of the deficit adding to the size of the debt. This puts upward pressure on rates. In the mortgage realm, the competition you're seeing now is because of the decline in refinances is leading lenders to narrow spreads in order to compete to try and stay in business.
Eventually those spreads will widen back out to normal profit levels once "players" start to leave the industry. So if you're looking for an environment where rates are not going up, it's just not going to be very realistic for the next couple of years.
The long answer is, if you're in the business to finance the purchase of homes that people want to live in, it's a good business to be in because the population is ever growing! There is no change in the attitude about owning a home. It's a generational thing and there are more Millenials than Baby Boomers now. So, 90% of Millennials say they eventually want to own a home. Long answer, yes be optimistic. Short answer, it's going to be a tough market.
Is there anything significant about the 30-year fixed rate crossing the 5% threshold?
If you look at the 30-year fixed rate from WWII to the year 2000, it averaged 6% (if you take out the high inflation rate in the 70's). If you look at it that way, 5% is still a full 100 basis points under the long-term average of what that rate would be. That being said, people only see a 5% place as a negative since we're used to a 3.5% to 3.75% rate for the past five or six years. You have to keep the long term picture in mind.
This rise in interest rate has clearly been paired with the strong house-price appreciation to slow the market down. You'll see that total home sales in 2018 is less than total sales in 2017. I predict that 2019 will be pretty flat compared to 2018. Household income is just going to have to adjust to the higher level of interest rates. In our view, 2017 will be seen as the peak pace of price appreciation. It doesn't mean that prices are falling in 2018, just that they are not rising as fast. Same for 2019.
What do you think the big story of the next 12 months is going to be?
It all depends on how far the Fed goes. One of the things about the tax bill that was passed is that many of its provisions expire. The Republicans in the House passed some extenders to make some of the components permanent, but it was nto addressed in the Senate. These tax cuts will come to an end at some point unless the Congress elects to make them permanent. This all stems around the election and people should include the election in their list of risks to think about when doing planning for their companies.