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22 | M R EP O RT EXPERT INSIGHTS F annie Mae's Douglas G. Duncan oversees strategic research and he is the housing agency's go-to source for information and analyses on demographics and the economy. His team's findings are used to help guide Fannie Mae's business decisions. He recently joined the MReport editorial team for a call to discuss the latest forecasts and findings from his economic team at the GSE. MReport // What are the high-level trends we should expect from the housing market this year? Duncan // Each year we pick a theme in January, and then we test that theme across the course of the year to see if we really have a handle on some of the underlying issues in housing and economic growth. This year, our theme is: 'The Economy and Housing Turning Toward a New Normal.' It's not arriving at a new normal, but it's turning toward a new normal. Fiscal policy is being reversed. It's been tre- mendously influential in the last two or three years. At the same time, monetary policy is being reversed. It's been immensely influential. We also shifted to a remote work environment. Is that a trend that's going to stick? This has led to geographic movement and prompted people to buy and move sooner than they planned. How are those things going to change? We're now in a market with a rising rate profile that's going to shift us from a market dominated by refinancing activity toward a purchase market. Will that be sustained? We see 2022 as a pretty good year for originations, but refinances are going to fall by half. Purchase [activity] will be up a little bit. Some of that is simply due to price appreciation, although the number of homes sold will be roughly flat. One important consideration to note is, in our forecast, for the sake of corporate consistency, we impose the forward yield curve from the last business day of the previous month on our model- ing of economic activity. One reason we do that is that, in the long run, we feel like the bond market has a better handle on where things are going than any individual economist. A lot has changed since December 30 in terms of the Treasury 10-year note yield and mortgage rates. We'll be closely watching the Fed's press conferences and their announcements. In our model, we have them ending purchases for their portfolio in March, and then immediately implementing a 25-basis-point increase in the Fed funds target, with another 25 basis points in June, and another 25 basis points in December. The bond market has priced anywhere from two to five rate changes. To some degree, it's a dynamic process. You could flip a coin as to whether their second move is in May or June. It isn't that big of an impact—one month differ- ence—but we paused in the fall because we think they're going to start running off their portfolio in the July time frame. We saw the 10-year yield rise suddenly because the market was surprised by minutes of the Fed's last meet- ing that suggested there was a strong discussion about running off their portfolio. That was new information for the market, and it had not been telegraphed, which is why the 10-year yield rose as rapidly and as far as it did. We think they won't increase rates in the fall because they're going to want to understand, how many dollars of runoff in the portfolio are equal to how many basis points of tightening. They are going to do both - they're going to tighten and run the portfolio off. The Fed already did this once in 2018. Our assessment is that during that period they were running the portfolio off and this Inventory Levels, Fed Rates, & More Douglas G. Duncan, SVP and Chief Economist for Fannie Mae, discusses what we should expect out of the housing market in 2022.

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