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24 | M R EP O RT EXPERT INSIGHTS first-time buyer balance sheets., As long as we don't get a 50-basis point hike in the next two months, purchase activ- ity in housing will weather the change in Fed policy. A key to this expectation is that there just aren't existing homes available. We have 1.8 months of supply, which is historically low. The two other factors I want to point out are that homes-for-sale that have not been started and homes-under-construction that are for sale are at the highest level since 2006–2007. When you look at the number of homes under construction that are sold, it sug- gests that builders who have been having trouble getting materials are getting through their backlog and now can offer for sale more options for homes they can build. What you don't see today is adjustable rate mortgage products with very weak credit standards. Credit standards are still pretty healthy. MReport // Will rising rates keep some buyers out of the purchase market? Duncan // While house prices won't appreciate as much as they did in 2020 and 2021, they'll still continue to show gains. When you combine increases in house prices with rising interest rates, at the margin, that's going to take some people out of the market. But is that as much of a constraint as the lack of supply? Probably not. Cash buyers are a problem. The cash share of the market is at a high level and it takes a lot of bidding to buy a home. First-time buyers typically are not cash buyers, and there's still that $2.5 trillion on household balance sheets that's out there. Some of that's going to get allocated to housing. The other issue you hear about is are single-family rental inves- tors. There is a frustration among first-time buyers that those single-family rental investors have cash to deploy and are part of a competitive mix that is an irritant. Meanwhile, Boomers have said "We're going to age in place" and they are doing exactly what they said they would. That is a big contributor to the shortage of homes for sale. MReport // The latest report from Fannie Mae's Economic and Strategic Research Group (ESR) predicts that home price appreciation will decline this year from last year. What is driving that outlook? Duncan // Probably the most important issue is the removal of the stimulus. A lot of those trans- fers went to people who were prospective first-time homebuyers. Prospective buyers may still have some savings, but there's no new stimulus coming in the door. The rise in rates as a result of tighter Fed monetary policy will create an affordability challenge on the other side of the equation which will lead to less competi- tion on the demand side and this may slow home price apprecia- tion. What I will caution against is making the inference that interest rates have a direct impact on house prices. That is not true. If you go back to the late '70s and early '80s, when mortgage rates were 12%–15%, house prices rose because of inflation. The number of houses sold fell significantly. The relationship is interest rates to activity levels. 'We also believe that there may be some changes in the ability to work remotely. We think there will be some slowdown in the pace at which people move related to COVID-19. First of all, the waves of COVID seem to be getting less serious from a mortal- ity perspective. And, to the extent that that eases the concerns about living in a densely populated area, you may see some slowdown on the demand side of the housing market. Meanwhile, businesses are starting to evaluate which jobs offer the ability to work remotely and maintain productivity, or even improve productivity, and which don't. We think in the course of that evaluation process there'll be a discussion between labor and management on what's the appropriate compensation based on the adjustment in pro- ductivity that takes place when jobs are done remotely. That is a discussion that will take probably another couple of years, maybe even longer, to work through, but it ultimately will have some impact on housing choices. EDITOR'S NOTE: This interview was conducted in late January 2022, and Duncan's comments reflect the state of the economic landscape at that time. "Cash buyers are a problem. The cash share of the market is at a high level and it takes a lot of bidding to buy a home."