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22 | M R EP O RT EXPERT INSIGHTS Douglas G. Duncan SVP and Chief Economist, Fannie Mae At Fannie Mae, Douglas G. Duncan and his team are responsible for forecasts and analyses of the economy and the housing and mortgage markets. Duncan also oversees strategic research regarding the potential impact of external factors on the hous- ing industry. He leads the House Price Forecast Working Group reporting to the Finance Committee. Under his leadership, Fannie Mae's Economic & Strategic Research (ESR) Group won the NABE Outlook Award, presented annually for the most accurate GDP and Treasury note yield forecasts, in both 2015 and 2016—the first recipient in the award's history to capture the honor two years in a row. Prior to joining Fannie Mae, Duncan was SVP and Chief Economist at the Mortgage Bankers Association. His experience also includes work on the Financial Institutions Project at the U.S. Department of Agriculture and service as a LEGIS Fellow and staff member with the Committee on Banking, Finance, and Urban Affairs for Congressman Bill McCollum in the U.S. House of Representatives. Duncan received his Ph.D. in Agricultural Economics from Texas A&M University and his B.S. and M.S. in Agricultural Economics from North Dakota State University. M // Could you give me a high- level summary of what you expect from the housing market in 2021? DUNCAN: The theme for the year is the economy speeds up and housing downshifts. That is not to say we expect housing to decline but rather we do expect the pace of home price apprecia- tion to slow. We'll end 2021 with stronger purchase mortgage origi- nation numbers—not refinance numbers, though. The economy will pick up faster than it has been, particularly in the second half of the year. The bottom line is still related to the virus. Last year, it was all about the virus and how that would impact the behav- iors of people, businesses, and policymakers, based on what we learned over time about the incidence, severity, and duration of the virus. And then, of course, it's resurgence. This year, it's about the distribution, effective- ness, and resilience of a vaccine. We have also started to see some variations or mutations on that virus around the globe. So, there's also the question of whether those vaccines are still effective to combat the new strains. Based on current data, setting aside whether or not these muta- tions of the virus are resistant to the vaccines, it looks like by roughly mid-year, the June-July time period, we may get to a place where herd immunity and vaccine distribution would be sufficient to significantly increase or improve attitudes and reduce concerns about the disease. Then, we would expect to see a pickup in economic activity. If that hap- pens (and that's what we have built into our forecast as our base scenario), then during the second half of the year, there's lots of available resources for households to increase consumption. And we think that they will. Second half growth annualized could run north of 6%, which would make the full-year growth at about 5%. A lot depends on that vaccine, which is not an economic vari- able. We would expect, then, to see some carryover of that [increased economic] activity into 2022. And for 2022, we have a forecast of over 3.5% growth. By that time, the economy may be close to back to where it was, maybe even a little better than where it was at the end of 2019. However, it still may not be up to what the [full] potential is. We do think there may be some inflation in the second half of 2022, but it's not likely to be virulent because of the fact that we're not back to long-term trends. So, what do the housing market and interest rates do in the midst of that? You've seen a rise in the 10-year Treasury [yield], which is the base for pric- ing in the mortgage arena. You haven't seen much movement on headline mortgage rates because the spreads were very wide in 2020 between the mortgage rate and the 10-year Treasury. That wide spread represented lots of profitability for mortgage compa- nies. They can give back some of that profitability and allow those spreads to narrow, and we expect them to do that in 2021. There's still something in the order of two-thirds of house- holds at today's interest rates that have a mortgage that they could improve by more than 50 basis points by refinancing. So, there's still lots of opportunity out there for refinance volume. But we