Housing market: ‘We characterize’ 2022 ‘as a pivot,' Fannie Mae chief economist says

Fannie Mae Chief Economist Doug Duncan joins Yahoo Finance Live to discuss what to expect from the housing market in 2022 and what first-time buyers are facing.

Video transcript

- The housing market has had a red-hot run amid low inventory and sky-high prices. Here to discuss the outlook for this year and how it's impacted by economic conditions, let's bring in our next guest Doug Duncan, Fannie Mae chief economist. Doug, thanks so much for being here today. Just want to start by looking at that economic environment in which the housing industry exists right now. So GDP grew at 5.7% last year. 6.9% in December. I'm wondering, how much growth do you envision seeing this year as inflation continues to run red hot, and where are we in the business cycle?

DOUG DUNCAN: Yeah, sure. I think the message you got today in the bond market from the employment report saw the 10 year rise something like around 10 basis points, which suggests that the market thinks the Fed will be more aggressive. And that employment report suggests they have a rationale for doing that. So our view is that the economy is already slowing, even though that fourth quarter number was strong. A lot of that was inventory building that was taken out of the first two quarters of next year.

So we think somewhere between 2 and 3/4% and 3% growth next year, which is still a good year. But it will be a year in which the Fed is tightening. For housing, we characterize this as a pivot. Several things are changing. First of all, all of the income transfers from the stimulus are over. So that's going to be withdrawn as a growth driver. The Fed is obviously changing posture. So monetary tightening is going to be the story, not monetary easing. That suggests that rates are going to rise.

And for the mortgage space, the fact that the Fed has said eventually they would like to have a portfolio with no mortgage-backed securities in it and that they intend probably around mid-year this year to start running off the holdings that they have in the portfolio, it means they're expecting private investors to step in and replace the Fed. And they may well require some additional yield. You've already seen some run up in interest rates. That will be paired with, while slower price appreciation, still price appreciation in 2022. Those two things at the margin will offer some constraints, particularly for first-time homebuyers.

- And so the Fed is expected to start hiking rates in March. And I'm wondering, how does that impact home buying, as mortgage rates already have started to climb, but obviously will start climbing more.

DOUG DUNCAN: Yeah. To the extent that rates continue to move up as the Fed takes additional actions, that will, as I said, particularly impact first-time homebuyers. Now, there is a cushion that suggests that this won't go too far, even if rates, say, break 4% by the end of the year. And that is while savings rates have fallen back to pre-pandemic levels, the dollars that households have in their checking accounts are about $2 trillion more than what the pre-pandemic trend line would suggest. So the consumers still have some money. And some of that will get applied in the housing space. The other challenge, however, is even if you want to buy a house, supplies are so low on your existing home side, it may be hard to find one.

- Yeah. Absolutely. And home values have soared over the last year, something up like something between 15% and 17%, creating vast amounts of housing wealth. Low rates are locked in. So how much appreciation do we see this year? And then what incentive really is there for someone to sell because, you know, your home is worth much more, but to replace that is very difficult.

DOUG DUNCAN: Yeah. That's a challenge. We saw something on the order of 18% increase in house prices in 2021 following about a 15% increase in 2020. Our estimate is that in 2022, the increase in prices will be somewhere in the 7% to 8% range. It sounds sort of funny to say way down to seven or eight, which is much higher than the long-term average. It is the problem for an existing homeowner that if you're going to sell your house, you have to find another one.

And my favorite anecdote recently is basically every realtor in the country has one house to sell. There are about as many houses available for sale as there are realtors. So that's the challenge is you may have equity in your existing home, and certainly do given the price appreciation, but finding another house, you may well give it away to the next owner if you make that shift.

- So it's been a tale of two cities, right. For those who have the money and can invest, it's been a great opportunity to buy. And some of those people buying are second-time buyers or they're investors. But what about for the first-time homeowner that just can't afford these prices? They're really being priced out of the market. They're having to go to the rental market. Those prices are going higher and higher. It's a housing crisis, if you will. And what do those people do? What's their recourse?

DOUG DUNCAN: Well, the big challenge for first timers has been that there were a lot of cash buyers in the market. So it's faster to close the sale of the home with someone who brings cash to the table because you don't have to go through the financing mechanism. So that's been the biggest challenge for the first-time buyer. That will get easier. That is, there will be less cash coming to the table, less bids over price.

But still, the demographics suggest we're not near the peak of millennial home buying yet. So there's going to be additional pressure on the demand side, even though we do expect a bit of a slowdown in sales this year, primarily driven by those two factors of declining affordability and the lack of affordable supply.

- And really quickly just want to ask you, do you see any relief in the rental market coming later on this year?

DOUG DUNCAN: Well, the rental market actually has a lot of the same characteristics as the purchase market, which is strong demographic demand. The rent appreciation did take a bit of a hit at the beginning of the pandemic. However, it has recovered and is on an upward profile again. So the renters will suffer some of the same issues as buyers are, which is appreciating prices, in this case, appreciating rents. And of course, all that shows up in inflation measures, which is one of the reasons that nominal interest rates are going to rise.

- OK. We will leave it there. Thank you so much. Doug Duncan, Fannie Mae chief economist. Thanks for stopping.