In this four-part podcast series, National Mortgage News will explore many of the issues that originators will need to consider as they plan their strategies for the year ahead. Up first, Chief Economist at Fannie Mae, Mark Palim, discusses the conditions he expects to see next year.

Transcription:

Heidi Patalano (00:36):

Welcome. Today we're talking with Mark Palim, chief economist at Fannie Mae, and we're talking about the economic broadcast for 2025. We're speaking to you at a time of great transition. I mean, first of all, the 2024 election is underway right now as we speak on the date that we're talking. And also you have taken over as the chief economist at Fannie Mae from Doug Duncan, who has been with the government sponsored enterprise for nearly 17 years. And I understand you have also been with Fannie Mae since 2009. So Mark, thank you so much for joining us today.

Mark Palim (01:13):

Well, thank you for having me on. I really appreciate it.

Heidi Patalano (01:16):

Before we get into the predictions, I wanted to ask you about how you can make such educated guesses amidst so many unknowns. I mean, we're trying to talk about what's ahead of us in 2025 when you don't know, for example, what the political landscape will be, what the results of the election will be. So can you talk us through how you made these predictions with so many unknown unknowns, so to speak?

Mark Palim (01:43):

Yeah, it's a terrific question. So when we do the forecast, one of the things we're doing is we're trying to create a base forecast, which we view as the most likely outcome. And clearly there are many possible outcomes and there are times when there is greater uncertainty than others, such as there is today with the policy environment. When it comes to policy uncertainty, what we've consistently done over the years is we only incorporate policy changes through two mechanisms. One is how the bond market or the stock market or the economy is reacting as it anticipates policy changes. So for example, the current rise in the 10 year treasury rate and mortgage rates over the last couple of weeks, that has a policy component. And the second thing is for the actual policy itself, we wait to see till we get enacted legislation that's signed or regulation that's finalized because there's so many uncertainties. If you pick any particular topic that could affect employment market, so the mortgage market, and you think about what legislation or regulation might look like, there's a lot of different ways one could play that out. So we wait to have some certainty around what policy will be to incorporate it in the base forecast.

Heidi Patalano (03:02):

Right, that makes sense. So let's take it from your October economic forecast, which expects unemployment to stay at 4.4 through next year. So tell me about the thinking behind that prediction and how you think what you think the outlook will be for the mortgage industry workforce in particular.

Mark Palim (03:22):

So as we look at the economy going into next year, we've got decent momentum in consumer spending. A little bit of caution on the side of business investment, but still doing fine. And then more importantly, we also are probably close to full employment and a lot of industries are at capacity or close to it or they've been running above, which is one of the reasons you've had inflation in the last few years. And so what you see in that forecast is a perspective that says we're pretty much round with 2% growth is what we're expecting for next year. And so we think job creation is going to be positive, but it's going to be modest and the labor force is going to be expanding, but not the way it has been expanding that gives you that sort of pretty flat unemployment rates of the year.

Heidi Patalano (04:16):

And we're going to expand in later questions about how the housing market specifically is looking for next year. But I wondered how does this apply specifically with mortgage employment?

Mark Palim (04:31):

Yeah, the second half to your question, you're right, the mortgage employment part. I mean, what I've been noticing when I speak to lenders is that they're making substantial investments in AI and in technology to improve efficiency. And the second thing is when you look at the data on employment in the mortgage sector, it didn't drop as much as it might have when you had the drop off in production volume that you've had for the last couple of years. So even if originations increased the way we have 'em in that forecast, I don't think the pickup and employment will be as strong as the pickup in originations because of those two factors we haven't dropped as much as we might have. And the focus on efficiency and using technology to drive efficiency at mortgage banks.

Heidi Patalano (05:24):

Well, in terms of the consumer price index, you see it hitting a low of 1.8 in the second quarter of 2025 and then rising again. So what expected events or conditions are you basing that prediction on?

Mark Palim (05:40):

Yeah, so the dip and then coming back up a little bit and flattening out, it's driven by two dynamics underlying inflation, headline inflation. One is what's happening to rents and the owner's equivalent rent. And our multifamily team thinks that shallow rent increases that we've seen this year one to one and half percent will probably come to an end in 2025. And in 2025 we're more likely to see two and a half percent rent increases. So as it works its way into the inflation numbers, that's one of the reasons you see them bottoming out and picking up a little bit. And then the second thing is in the last quarter we've had a pretty significant drop in oil prices and we think that'll just have a little bit of an increase next year in oil prices back closer to the averages that we had earlier in the year.

Heidi Patalano (06:35):

And so pivoting back to the mortgage market in particular, you're predicting that mortgage originations will pick up in Q2 and Q3 next year with a 30 year fixed interest rate hitting 5.6% in the second half. So tell us about what led to those conclusions, those predictions.

Mark Palim (06:55):

Yeah, so starting off with the mortgage rate forecast, as I think many of your listeners will know, we base our mortgage rate forecast on what's happening with the forwards. And obviously since we put that up, trouble forecast out rates have risen meaningfully both the 10 year and the 30 year mortgage sell and they remain vault out. So you'll see some movement in our forecast going forward on that. But more importantly for the production numbers, we do have an increase in existing home sales next year, a little over 10% that'll obviously contribute to purchase mortgage originations. But we're coming off an incredible low rate. We're running below 4 million units for the moment, so it's still relatively low overall home sales. And then the second thing is we have is a little bit of an increase in refi the number, the percentages is large, but again, coming off a very, very low base. So those are the combination of factors that give you that payout.

Heidi Patalano (07:57):

Well, it's interesting. So you're mentioning a slight increase in existing home sales, correct? Yes,

Mark Palim (08:02):

Yes.

Heidi Patalano (08:03):

So another question I have for you, we don't expect rates, interest rates to hit the pandemic lows of two and 3% anytime soon, and we're still having this extended lock-in effect, although it sounds like perhaps that will loosen up in the next year. But what do you think will be the impact long-term? How will this extended period of this lock-in effect reshape the housing market going forward?

Mark Palim (08:35):

Yeah, I think it's going to be with us for a while. I mean, the rates that we sorted in the pandemic were incredibly low, and that was because we were in the middle of a national disaster and a shutdown of the economy. So obviously I think most people are hoping we won't see that again. And so we won't see those kind of rates again. Even if the rates do fluctuate with the economic cycle, a two and three quarters rate in the 30 year is pretty atypical. So you're right, the lock-in effect will be around for a while. We also see in the data of course, that people pulled forward sales during that pandemic period. Home sales really jumped up in the second half of 2021 and 2022 the whole year. So part of that was renters by choice who moved, and also people who were maybe going to retire a few years later and accelerated that move. So between those two factors to lock in and pulling some sales forward, we're going to be running below the levels that we were running in 2016 to 19. It's going to continue to have an impact on the volume of home sales.

Heidi Patalano (09:47):

Do you think we're looking at these kinds of conditions for another 10 years or how long could this go on for?

Mark Palim (09:54):

Yeah, 10 years is probably, well, first of all, we put out a two year public forecast, but 10 years feels a little bit long because life does happen. Like I was mentioning, people retire, people move, people have kids that family structure, they take a job far away and can't work remotely, whatever the reasons are. And then the other thing too to remember is about 40% of homes are owned outright and there's a certain amount of cash volume in the market. So that'll create a certain amount of sales for sure. And people are paying down their mortgage that it's self advertising. So a number of those people with a really low mortgage rate eventually will turn around and have an LTV of 20 and all of a sudden that mortgage rate is less of a constraint on them moving.

Heidi Patalano (10:46):

Right. Well, I guess that's a great point. And I guess the reason I'm talking and thinking about 10 years ahead is because my next question is about baby boomers. Certainly I know many personally that are aging in place, they're staying in their home where that they've completely paid off or they have that very low refi rate. So how do you see the baby boomers shaping the market in the coming years, let's say just in the next two to three years?

Mark Palim (11:16):

Yeah, we did a survey, I believe it was last January, but we did a survey within the last year asking all Americans about their housing needs and preferences. And as stated previously, they want to age in place. I think telemedicine and in particular helps make that possible. Multi-generational housing helps make that possible, which is the flip side of unaffordability for young people is that they're living longer with their older relatives. So I think those factors are shaping the market now. We'll, to do that, I do believe the baby movers when they say they want to age in place and there's good reason for them to do that, they tell us that their home is an important part of their financial security and that they know that a spouse passes away and they start having health issues, then that home is a source of funds that they can use and maybe they'll move closer to child and rent and then they can use part of that money to help with elder care or medical expenses and things. So they're going to continue to have a huge impact on the housing market and not rushing off anywhere.

Heidi Patalano (13:06):

Certainly when we're talking about how kind of stagnant existing home sales have been for such a long time, we then turn over to discussions about new supply. And so you're predicting that single family housing starts will pick up in the second half of 2025. And I'm curious to hear actually related to that, what you think about the output and the uptake of manufactured homes. They're often touted as a way to help solve the affordability issue, the supply issue, but are buyers biting and what do you think it will take for the US as a whole to really get on board with this form of housing?

Mark Palim (13:50):

Yeah, I think that the two questions very much follow from each other. The fact that baby boomers are aging in place and that you now have remote work is a bigger option or hybrid work, flexible, whatever you want to call it, people have been willing and able to move out a little further from center cities and that's made the new home market far more competitive. And we've seen the price difference between new homes and existing homes really compressed and the size of new homes per square foot diminishing a little bit, the builders doing other things to make their product more affordable. So in our forecast, we remain relatively optimistic about new home sales with that decline in mortgage rate, but just also because of the flip side of the lock-in and the low existing home sales. So within the segments, manufacturing housing is an important segment.

(14:45):

I think the limiting factor on manufacturing housing is the, there's a couple of things. One of them is having land where it makes sense to place it. The second thing how zoning is and what the zoning is, then you have manufactured housing, you have modular housing and you have stick built. And it's been interesting to also try to track what's going on with modular housing, which is harder to see. But I think there's some interesting factors. What I've looked at in the past at this is that the economics of it are depending on the distance from the factory of mh, even if you considering mh, the economics between that and stick-built depending on the site issues and how far you actually have to have it shipped, make it that stick-built is pretty competitive. So there are some economic issues there. There's some zoning issues, there's still some consumer preference issues and perception issues. Even though I've gone to visit manufactured housing communities that have to me looks like a lovely bungalow and it's so different, the setup, it just doesn't look like the MH of all, for lack of a better term.

Heidi Patalano (16:03):

Yeah, certainly. That's very interesting about the stick-built, being competitive with the manufactured homes, something I don't think we've heard discussed.

Mark Palim (16:13):

Yeah, once you add in the distance that you have to transport it, depending what your road network is, where you bring it in, the fact that you have to prepare the site, you got to add in the site preparation costs. So it's not just the price of the unit.

Heidi Patalano (16:28):

Yeah, that's interesting because we're doing another series right now on home builders and how it pencils out for them to try to put some first time home buyer friendly sized homes on the market. How can they build a home that's at an affordable price point and still make a profit on it? And it's an interesting question because I think now the new purchase home price, the average is in 400,000, which is still not very affordable for a lot of first time home buyers,

Mark Palim (17:04):

Even though I agree with that. That's all fair. But the last conversation I had with a builder was last week and they're working in Florida and saying that things in the $400,000 price range, high threes, mid force was selling in a week. That a really strong demand that the product they have at 700,000 was taking a little bit longer to move. So there still is a lot of demand at the entry level, first time price point.

Heidi Patalano (17:35):

Right, of course. Yeah. It's just building them, making a profit at that point. Well that's very interesting to hear. Well, I have one last question for you. Where our audience, of course is made up of mortgage professionals. How do you think lenders should be thinking about allocating their resources given the economic and housing market conditions that you're predicting for the months ahead?

Mark Palim (18:03):

And it is going to continue to be not the large market we had a few years ago, and it's going to continue obviously to be a much more heavily purchased market. And it's really interesting when I talk to lenders to see the innovative things they're doing with AI and in terms of how they manage their call centers, how they improve the customer experience and create a more uniform, more rapid customer experience for people on the servicing and the origination side, whichever side the consumer is. So I think that's going to be continue to be the focus. And then of course, the other issue that's wide open is what's happening with the realtor settlement, what does that mean about for lenders who are focused on the purchase market? What's it mean about their network for sourcing loans and how does the business change? And that's obviously a developing story

Heidi Patalano (19:02):

And what we'll be watching closely in the coming weeks. Alright, well Mark, thank you so much for your time. I really appreciated talking to you and hope to have you on again soon.

Mark Palim (19:12):

Thank you for inviting me.