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Powerful Data Produces Good Business

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Fannie Mae's Doug Duncan puts housing under the microscope.

“The role of chief economist  at Fannie Mae is a little different than a chief economist role anywhere else,” Doug Duncan, Fannie Mae’s chief economist, started out. He then went on to detail a list of responsibilities, data and analytics sources and reports, and economic teams under his supervision that is, in a word, staggering. “At the end of the day, all of this work, these forecasts, these strategic planning groups, these analyses, are geared to help every player in real estate, from lenders to consumers to investors, understand what we are all doing and thinking about real estate and housing at any given time,” he said.

Fortunately, Duncan is up to the task. After spending 16 years at the Mortgage Bankers Association (MBA), the last seven of which he was the MBA’s chief economist, he transitioned to his current position, senior vice president and chief economist with Fannie Mae, where he is the head of economic and strategic research.

“A lot of things that might be separate from the economist’s team in other organizations are included at Fannie Mae,” Duncan said. “We do forecasts, obviously, but we also have a strategic planning group (the Economic and Strategic Research (ESR) group), a group that runs pilot programs, and a group that studies startups, for example. We survey not just consumers and residents, but also lenders to find out what they are doing, seeing, and thinking.”

doug duncan 169 EDITDuncan noted that while most people think of Fannie Mae as existing primarily to serve homeowners and further homeownership in the United States, that role is more multifaceted than most imagine. Duncan’s division of Fannie Mae is dedicated not just to identifying current and future housing trends, but also to understanding what events may have contributed to the evolution of those trends and the motivations and rationale behind the actions of all parties involved.

For example, Duncan said, at present his ESR group is involved in a great deal of research revolving around what he called simply, “the question of floods.” He explained, “We are looking closely at what we believe we know about risks related to flooding.” Because Fannie Mae has predetermined underwriting standards that compel it to purchase certain mortgages from lenders if no other buyer emerges , it is vitally important the GSE understand every facet of risk to a physical property at every point in time.

In addition to Fannie Mae’s National Housing Survey and Mortgage Lender Sentiment Survey, Duncan and his team are constantly involved in the diligent analysis of a variety of “Special Topics” gleaned from the data collected through the two cornerstone reviews, which are conducted monthly and quarterly, respectively. At present, special topics include digital mortgage technology, housing affordability, barriers to homeownership, and cybersecurity.

A Quick Look at Fannie Mae’s Market Intelligence

“Everything we do is intended to help actors in the housing market and economy understand what is happening in these environments today and what that might mean for tomorrow,” Duncan said. Below, you can see some of his department’s featured research publications, surveys, and reports:

This monthly economic outlook details interest rate movements, housing and mortgage market forecasts, and the overall economic climate. ESR also provides a weekly report, The Economic & Housing Weekly Note, as a “snapshot” of current housing data.

A monthly telephone survey polling 1,000 consumers a month on housing topics. This survey is distilled into the Home Purchase Sentiment Index (HPSI), an indicator used to provide signals on housing market movement.

Fannie Mae’s quarterly online survey of senior executives of Fannie Mae’s lending customers. The survey includes standard tracking questions and also special topics.

The Process Behind the Forecasts

With this kind of data at his fingertips and a highly skilled population of economists and subject-matter experts available to distill and refine the continuous onslaught of information, Duncan has become a master not just of the accurate economic forecast, but also of the actionable economic forecast. Because Fannie Mae’s goals center around the support and sustainability of housing, Duncan’s insights often rely on his ability to discern why individual players will act in a certain way in the future.

Duncan explained home prices may seem straightforward on the surface, but many factors lie beneath. “When we look at the Home Purchase Sentiment Index (HPSI), for example, we can identify certain trends in what consumers are thinking,” Duncan explained. “In September 2018, for example, the HPSI remained flat because perceptions of high home prices and expectations for rising mortgage rates continued to weigh on potential homebuyers. However, to get a clear forecast, you have to combine that information with what we know about how most consumers think about the value of their homes. It is not just the price of their home, but it is how they are enjoying the home, how much of their income ownership requires, their long-term plans, etc.”

He added, “You also have to consider lender sentiment to get the full picture. In September, for example, lenders remained bearish because of ongoing anemic refinance activity and the worst purchase mortgage demand for a third quarter in the Mortgage Lender Sentiment Survey’s history. Consumer demand was one of the top two reasons for lenders’ downbeat profit outlook.”

When these diverse particles of information are combined, a clearer picture of housing market sentiment begins to emerge: “Consumers are attuned to the divergence between the slowing housing market and strong macro economy. They are becoming less optimistic about both homebuying and -selling conditions [even though] perceptions of income growth and confidence about job security are high,” Duncan said. “Lender sentiment indicated as early as this past June that on the lending side of the equation, demand was likely to fall and, with it, housing sentiment.”

For real estate investors, this type of information can serve as a glimpse into the “playbook” of the championship team in the sector. Fannie Mae is, itself, an investor in the market, albeit an extremely powerful one both playing by and bound by different rules than the “average” real estate professional. Because the GSE is bound to purchase certain types of loans, Duncan’s economic insights can help it identify areas where threats may loom. While most investors are not operating on the same scale or even purchasing mortgages or mortgage-backed securities, insight into what national trends are in the Fannie Mae sights can help with local market analysis and due diligence.

An Outlook of “Measured Optimism”

Doug-Duncan-Team
Duncan (center) confers with internal communications team members Chloe Jefferson (L) and Chay Rao (R).

Looking forward into 2019, Duncan and his ESR Group predict relatively strong real GDP growth although, Duncan noted, “a lot will depend on how the midterm results affect economic policy.” However, Duncan’s expectations for housing, he said, “have become more pessimistic” in recent months.

“Affordability, especially for first-time homebuyers, remains at the top of the list of challenges facing the housing market,” Duncan said, going on to observe that for real estate investors making investment decisions in local markets, keeping this issue in mind could prove advantageous.

“The first thing I always say when someone asks about the ‘affordability crisis’ is that there is no affordability crisis,” he emphasized. “Appreciation absolutely is slowing, but that means an investor considering purchasing rentals, for example, should look at the investment and ask themselves, ‘If I buy this rental in this market, how many people [should I expect to be] attracted to this market?’ Part of the answer will frequently involve housing affordability in that market.”

Investors who are able to offer housing options at affordable levels either through acquisition strategies that enable them to keep costs down or creative financing or renting structures that keep monthly rents at that magic “one-third of local median income” rate will likely find their properties selling or renting while others stagnate on the market or sit vacant.

“There has been no change in the attitude about owning a home,” Duncan said, noting that millennial buyers, now the largest generational home-buying population in the country, ultimately value homeownership as much as their predecessors – and there are more of them. “90 percent of millennials say they want to own a home. In the longer-term, that is a reason to be optimistic. However, in the short-term, it could be a tough market because interest rates are going up,” he said.

However, Duncan added, “If you are in the business of providing homes that people want to live in, then it is a good business to be in.”


What is Fannie Mae?

Fannie Mae is the common nickname for the Federal National Mortgage Association (FNMA). Fannie Mae is a United States government-sponsored enterprise (GSE), which means its specific, intended function is to enhance the flow of credit to targeted sectors of the economy – in this case, the housing market – and make those segments more efficient, transparent, and secure for investors and other suppliers of capital. While most people believe Fannie Mae became a GSE in 2008 after the housing bubble burst and created a national mortgage-based meltdown, the association has actually held this status since it was chartered by the U.S. Congress in 1968.

Fannie was originally founded in 1938 as part of President Franklin D. Roosevelt’s New Deal, which was created in order to help the country recover from the Great Depression. The New Deal created the Federal Housing Administration (FHA), and Fannie Mae, operating as the National Mortgage Association, had the explicit purpose of providing banks with federal money to finance home mortgages. At that point in time, it was simply operating as part of the federal government. The goal was to raise homeownership and affordable housing, an aim it retains in the present day. Fannie Mae was privatized in 1968 in order to remove its activity and debt from the federal budget. Two years later, the entity received authorization to purchase conventional mortgages. Eventually, Fannie Mae and competitor Freddie Mac (Federal Home Loan Mortgage Corporation, FHLMC) facilitated the evolution of today’s secondary mortgage market.

“Our intent is always one of partnership,” observed Doug Duncan. “We look at the country’s housing-related issues in as much depth as possible to make sure we have put as much thought into each topic as we can.”

Learn more at FannieMae.com.


Understanding Housing Affordability

Housing affordability levels are generally measured through consideration of a local market’s median household income and the household income necessary to qualify for a 30-year fixed-rate mortgage to fund the purchase of a local median-priced house. Conventional wisdom states that in general, the best chance a homeowner has of qualifying for such a mortgage is to put no more than about one-third of their household income toward that monthly payment, and generally the same is assumed to be true for renting.

In reality, however, housing affordability is a far more complicated topic, since the issue is not so much how much you should allocate for housing, but how much you must allocate for housing in order to live in an area. Many borrowers opt to put as much as 36 percent of their income toward their monthly payment before paying basic expenses like utilities and homeowners insurance, and, in some areas of the country, renters find themselves putting much more than half of their income toward monthly rents.

Conclusion: An investor whose investment strategy permits them to profitably offer housing options to local buyers and renters seeking to spend the recommended portion of their income on housing will likely have no trouble selling properties or filling vacancies.


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