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M R EP O RT | 23 EXPERT INSIGHTS resulted in a roughly 60 basis point increase in the 10-year yield. It'll be interesting to hear how the Fed thinks about the combination of running off their portfolio and raising the Fed funds rate. Obviously, talk about the tapering has resulted in wider spreads because the Fed is not an economic buyer. They are a policy buyer. With them backing out, you will start to see that in- vestors are going to require more yield. So, the secondary spread is widening as we speak. That will probably continue for a while. If you look at long term averages, it's not going to blow-out. Now, one thing that helps the Fed is that a 50% drop in refinancing means there will be a lower level of new production to be absorbed by the market. The other issue they have to consider is that if you look at the structure of the outstand- ing portfolio from a maturity perspective, they have about $3 trillion dollars of U.S. Treasuries that are going to mature in the next two years. In terms of the share of the mortgage-backed security (MBS) market, there's not that same share of MBS that's going to mature. If they want the balance between Treasuries and MBS to stay constant, they're going to have to signal to the market if they are comfortable letting Treasuries run off faster than MBS. We also don't really know what the Fed's expectations are about long-term growth of the economy. It's clear that economic activity is slowing. We think 2022 will see about 3% growth, which is still above the long-term growth path of 2.5%. The growth expectations are meaningful because the Fed does not have a great record of being able to fight inflation without bringing on a recession. Of course, that's their objective—to tamp infla- tion down—but not bring the economy to a recession. It's a delicate balance. One other question to consider is: will we return to some sort of a normal cyclical pattern because COVID has completely disrupted the cyclical patterns of home sales activity? Also, how much more migration will we see from dense to less dense areas? How are businesses going to deal with employees on remote work versus coming back to the office? MReport // Do you feel we're heading toward another housing bust? Duncan // I don't. Part of the reason for that is demographics. We still have three or four years until we see the peak of demand for first-time homebuying by Millennials. The Boomers are doing what they said they were going to do, which is to age in place, and that is s part of the reason you're seeing home price appreciation. Typically, first-tim- ers buy existing homes, but there aren't many available. My favorite anecdote today is that each real- tor in the United States has one house to sell. I certainly don't think that house prices will see another year of 18% gains. Our forecast has home price gains coming down to about 7% to 8% this year. A big piece of that is the removal of those stimuli. If we take a look at all of the stimulus and add up what a family of three—two parents and a child—could have received through direct payments, payroll protection, unemployment insurance, they'd have had $11,400 in cash. If they converted that to a 3% down payment, that would be a $380,000 house. So, there's no question that the stimulus was actually impactful on the purchase side. You can also see it in under- writing because debt-to-income ratios fell among first-time buyers, and that's where the credit constraints are usually the most difficult. That's changing now. Debt-to-income ratios for first-time buyers are starting to rise. Loan-to-values are flattening out. So those indicators are, to us, evidence that the elimination of additional stimulus payments is starting to constrain [buyers]. While the savings rate nationally is now a little below the pre- pandemic savings rate, the volume of savings on household balance sheets is $2.5 trillion dollars more than would have been the pre-pandemic trend. So, there's still a lot of money on household balance sheets, but less of it is on "One other question to consider is: will we return to some sort of a normal cyclical pattern because COVID has completely disrupted the cyclical patterns of home sales activity?"

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