Where The Market Is Headed, Fannie Mae Chief Economist

Five key takeaways on America’s housing market

By Alejandro Lazo

September 11, 2013

Mortgage titan Fannie Mae depends
on Douglas G. Duncan, its chief economist, to keep a close eye on the nation’s
housing market. Duncan met with Times editors and reporters in Los Angeles this
week to share his views on where the market is headed. Here are five key
takeaways from his visit.

Housing isn’t really going gangbusters. Despite those eye-popping price jumps,
housing is not in a bubble or even a boom. Real estate is also not likely to be
the same economic driver it once was, Duncan said. “We are of the view
that housing is continuing to grow, but we are not of the view that it is
robust,” he told The Times. While home prices have posted double-digit
increases this year, those gains are just bounce-backs from very low bottoms.
Meanwhile home builders have been slow to acquire
land and hire adequate help, and that has made housing’s overall contribution
to the economy smaller than it would be otherwise. When construction finally
does get humming along at full tilt again, the industry will probably
contribute a million fewer jobs than it did during the boom, Duncan said. Those
jobs will simply have to come from other parts of the economy.

The rise in mortgage interest rates will not choke off the
recovery. Economists at Fannie Mae recently studied the relationship between a
sharp increase in mortgage-interest rates and home prices. They found there is little correlation
between the two. Sales may decline but prices are still likely to increase.
Duncan also doesn’t expect mortgage-interest rates to surge again. Expect a
more gradual increase, he said. “I don’t think that the rate rises will be
as sudden as the first piece we saw,” Duncan said.

Homeownership is the goal but renting has lost its stigma. The
homeownership rate has fallen drastically since the boom years, raising
questions about whether America will become a rental society. But much of the
growth in the rental market has come from the single-family housing market, as
investors have snapped up homes and turned those properties into rentals,
meaning that former homeowners have tried to re-create their experiences. While
the homeownership rate is not likely to rise anytime soon, even those people
who lose their homes are likely to become homeowners again. The aspiration to
be a homeowner remains unchanged by the crisis, and most renters would still
like to own a home, Duncan said.

It is indeed a good time to buy. Home prices are still down
considerably, even though they are up from their bottoms. Mortgage-interest
rates are still very low despite the recent spike this year. But you should
only buy a house if you can afford it, Duncan said.

Investors pose a possible risk. Big investors have become a significant factor
in the housing market’s recovery. The question is, will new home construction
increase supply, just as big investors decide it’s time to sell their holdings?
If they were to do so, that could usher in another decline, though not one of
the same magnitude as the last housing downturn, Duncan said. Investors should
be watching the home builders closely. “If I were them, I would have a
close eye on what’s actually happening in construction, because that is going
to be one form of competition,” Duncan said. Another form of competition
for both investors and builders will be homeowners who are freed up to sell
their house after spending years “underwater.”

Source: Los Angeles Times


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