June 19, 2023 • 51 mins
In this episode of Batting 1,000, Dale Vermillion speaks with Doug Duncan, Senior Vice President and Chief Economist at Fannie Mae. Doug brings his extensive expertise to discuss the current economic climate, the housing market, and future trends. He provides a comprehensive overview of market dynamics, interest rate fluctuations, and the impact of demographic shifts on housing demand.
Doug also shares valuable insights on the importance of strategic decision-making in uncertain times and the role of technology in transforming the mortgage industry. This episode is packed with expert analysis and actionable advice for professionals navigating the complexities of the housing and mortgage markets.
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In This Episode
Current economic climate and interest rates
Doug Duncan explains the factors influencing the current state of the economy and why mortgage rates have not behaved as expected in recent months. He delves into the impact of the Federal Reserve's policies and external economic pressures.
Demographic shifts and housing demand (starts at 7:34)
A discussion on how demographic trends, particularly the aging baby boomers and the rising millennials, are shaping the housing market. Doug highlights the challenges and opportunities presented by these shifts.
Supply constraints and the role of builders (starts at 15:23)
Doug discusses the critical role of builders in addressing the housing shortage and the obstacles they face, including skilled labor shortages and supply chain issues.
Making strategic decisions in uncertain times (starts at 20:14)
Doug shares his perspective on the importance of understanding trends and momentum in the market to make informed strategic decisions, even amidst uncertainty.
Technology's impact on the industry (starts at 30:58)
Insights into how technological advancements are reshaping the mortgage industry, enhancing efficiency, and altering traditional business models.
Doug's rate and market forecast (starts at 38:16)
Doug provides his forecast for interest rates and housing market trends over the next few years, offering a realistic outlook for industry professionals.
Soundbites
"Every human being on the planet puts their head down every night on a piece of real estate somewhere. It's part of the human condition." — Doug Duncan
"Understanding trends and momentum in the market is crucial for making strategic decisions." — Doug Duncan
"It's not about predicting the future perfectly, but about being prepared and making informed decisions." — Doug Duncan
About Doug Duncan
Doug Duncan is Senior Vice President and Chief Economist at Fannie Mae where he is responsible for forecasts and analyses of the economy and the housing and mortgage markets. Doug also oversees strategic research regarding the potential impact of external factors on the housing industry.
Named one of Bloomberg/BusinessWeek's 50 Most Powerful People in Real Estate and Inman News’ 100 Most Influential People in Real Estate, Doug is Fannie Mae's source for information and analyses on demographics and the external business and economic environment; the implications of changes in economic activity on the company's strategy and execution; and for forecasting overall housing, economic, and mortgage market activity.
Doug is a Hoyt Professional Fellow at the Homer Hoyt Institute. He was chosen as the North...
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Doug Duncan (00:01):
It is true that every human being on the planet puts
their head down every night on apiece of real estate somewhere.
It's part of the human condition.
So now, you know, depending on population,wealth, income, risks, there's a whole
bunch of ways that can play out, butit will always be part of the story.
(00:24):
And so it is to me,
Voice Over (00:33):
you're listening to batting 1000 with Dale Vermilion,
where heavy hitters from mortgage,real estate, and business share their
secrets for lasting success with yourhost award winning sales strategist
and industry icon, Dale Vermilion.
Dale Vermillion (00:48):
All right.
Welcome to this month'sbatting a thousand.
Uh, I am so excited to haveyou guys with us this month.
And I've got an absolutely incredibleguest, uh, good friend, uh, a man that
I have admired for a lot of years.
I've, I've watched him, uh, on the stageso many times over the last 15 years, uh,
speaking to the mortgage industry, um,probably longer than 15 years, actually.
(01:10):
Uh, Uh, Doug Duncan is with us today.
If you don't know who Doug is, uh,I'm sure you do cause he needs no
introduction, but let me just giveyou a rundown on Doug's credentials.
By the way, Doug, I could spend thisentire time just talking about your
credentials, but I'm going to give themthe one that the ones that I've, I've
written down that they want to know.
Uh, Doug is a senior vice presidentand chief economist for Fannie Mae.
(01:30):
Uh, he was previouslywith the MBA before that.
He's responsible for the forecastanalysis of the economy and the
housing and mortgage markets.
There is nobody that knows thisindustry better than Doug does.
Uh, he oversees in his position, strategicresearch regarding potential impact of
external factors on the housing industry,and just a couple of cool things.
Uh, Doug is a Bloomberg businessweek, 50 most powerful people.
(01:53):
People in real estate.
That's a huge accolade.
He's also in the News's 100 mostinfluential people in real estate.
And underneath his leadership, uh,Fannie Mae's Economic and Strat Strategic
Research Group earned the 2022 Lawrence R.
Klein Award for blue chip.
Forecast accuracy.
Uh, they also won the NABE Outlook Award.
(02:15):
Uh, that's, you guys are the firstrecipient of that, um, that did it back to
back years, which is a really cool thing.
That's the first time in history.
And he is a trustee of North DakotaState University, PhD in agriculture
economics from Texas A& M, whichmeans I need to call you Dr.
Duncan, and he has a BS andMS in agricultural economics
from North Dakota State.
So Doug, great to have you.
(02:36):
So honored to have you here.
Doug Duncan (02:37):
Great to be with you.
It's.
It's a, it's a pleasure.
And, um, just to be clear, all thoseawards are because I have a great staff.
I try not to screw it up.
Dale Vermillion (02:48):
I love it.
Well, look, we want, we want to talk,uh, obviously everybody wants to know
what's happening with the marketplaceand you and I chatted a little bit.
And I want to talk about, you know, therecent trends and why the rates have
not responded the way they normally doin the market and some of the things
that have been factors that have driventhat and kept rates up a little bit.
(03:08):
The forecast for what you see and mortgageand real estate and housing and all that.
We'd love to hear that.
But you and I were having alittle conversation backstage and
you'd mentioned something that Ireally would like to start with.
And you were talking about whatthe biggest problem is that chief
executives have in the mortgage world.
So share with me your thoughtson what we were talking about,
because I thought that was a greatway to start this conversation.
Doug Duncan (03:30):
Yeah, sure.
I was trying to understand when I wasfinishing my, my degree, what, what's
the value that economists can providein the executive office and in my
first couple of years at NBA, as I wastalking to some of the leaders, uh,
became clear that really their challengeis to understand trend and momentum.
(03:53):
Where is activity in their businessand the environment in which
their business gets executed?
Where is that activity going?
And then at what speed?
So you may, you may choose to say, well,we don't necessarily agree with the trends
today, but you should know what they are.
And have a good reason for why you arerelative to that trend where you are.
(04:18):
And like, likewise, um, whether you areat speed with the trend or behind or
ahead, those things that seem to me areimportant because it, it determines where
you're gonna allocate your resources.
Uh, and there's always risk to manage.
Uh, and understanding those thingswill give you some insight into
(04:39):
the, the risks to the, to the, uh,objectives that you're trying to pursue.
Dale Vermillion (04:45):
Now, if you would share the, analogy that you gave me, uh, when
we talked earlier about that, uh, fromback in your, your naval days, talk
about that for just a minute, becauseI thought that was a great analogy.
Doug Duncan (04:54):
Yeah, it was, uh, it's always one, one thing that my father
taught me when I was growing up was justpay attention to everything that you do.
You may not be what you alwayswanted to do, but you're going to
learn something if you're payingattention, no matter where you are.
So I was in the Navy, I was anenlisted, uh, petty officer, uh,
and from time to time I would standwatch and keep the log on the bridge.
(05:15):
Uh, and as I watched the, the captaingive orders in, uh, in directing the
ship, it was clear that whether youwere in a fog bank, Or you were in
bright, clear skies, you were going tokeep the ship going, no matter what.
And if you're in a fog, you don'tnecessarily know what's out there, but
you can't just stop the ship, right?
(05:36):
And that's a lot like running a company.
And maybe today there's, there'sa lot of uncertainty about where
the housing sector is going to go.
You can't not go, and you have to makesome decisions, uh, and, uh, actually,
there was Early in my days at mortgagebankers, uh, Leo Knight, who many
of you probably knew, uh, called meand he asked me, he said, dog, I've
(06:01):
got a board meeting at five o'clock.
He said, I have to makea decision on this issue.
I understand you're anew economist at MBA.
Maybe you could help me with this.
And so he told me, I don't evenremember what the issue is.
He said, just call me back at threeo'clock and tell me what you think.
So I looked at a bunch of things.
I'll call them at three.
And I said, well, if I look at this,it says, uh, this might be a good idea,
(06:22):
but the data is kind of iffy and I lookat it with a different set, uh, gives
a little bit different indication andthe data is not perfect there either.
And he stopped and he said, Doug, thedata won't be better by 5 o'clock.
He said, I'm just asking your opinionbased on your professional expertise.
How would you make this decision?
That was a really important lesson.
(06:43):
I've always been grateful for him doingthat for me because it, it brings it
clear, you have to make a decision,even though the data aren't better
when you have to make that decision.
Dale Vermillion (06:55):
That's really, that's, that's rich information.
Well, speaking of the fog bank, I think alot of lenders today feel like they'd been
in that fog for about a year, you know,year and a half now, since about early
2022 and, uh, particularly recently, itseems like, you know, rates have just not.
Followed and tracked and responded andthe bond market has the way it normally
(07:17):
does to inflation factors and those kindof things And I know there's a whole
lot of reasons for that between the debtceiling problem that we had and bank
crisis But i'd love to hear I mean nobodyknows these things better than you do.
I'd love to hear a little bit fromyou on Where we're at today why where
we're at today why rates are actingkind of Fickle and where you see things
(07:37):
going in the future with rates and withhousing and with the market, just kind
of give us a, an overview of what you'rethinking from an economist standpoint,
um, with all the data you look at,
Doug Duncan (07:48):
um, sure.
Um, well, as everybody knows, thefed met yesterday and decided not
to raise the fed fund started.
Yeah, but then they muddiedthe water a little bit by,
uh, their summary of economicprojections, suggesting they would.
Uh, at some point raise to 50 basispoints, they may do it in two quarter
(08:11):
point increments or something.
Um, which suggests that they think thatinflation is not yet under control.
Um, and we would agree from acore, uh, inflation perspective.
Well, typically when you get as big arate shock as was in the mortgage industry
where rates doubled within a year.
(08:33):
You would see a lot moreslowdown in housing than you saw.
There was an initial slowdown, butthen the reality of the pent up demand
from the millennials who are still acouple of years away from peak first
time home buying age and the lackof supply exacerbated by two things.
(08:55):
One is the boomers aging in place.
And the second one is the GenXers who don't get any airtime.
So I'm giving them some airtime.
Now they're the ones thatlocked in 3 percent mortgages.
So it's not going anywhere.
So that's a huge chunk of theexisting homes out there that are
really in a way taken off the market.
And so it doesn't take a lot offinancial power on the demand side.
(09:20):
For that, uh, in thisinstance, stabilized prices.
First of all, I think our view, ifyou went back six months was over
a two year time period, we probablysee a 10 percent decline in prices.
Now we've chopped that probably in half.
And we've only seen a couple of percentagepoints nationally, though regionally,
there are significant differences.
Dale Vermillion (09:41):
Right?
Doug Duncan (09:42):
But so, so rates that rise in rates actually hasn't caused the problem
that, uh, that a lot of folks thoughtit, of course, chopped off refinances.
There's, there's just only ateeny portion of households that
it makes sense to refinance.
So those numbers have dropped way off.
(10:03):
So the market is trying to assess, um,how far the Fed is going to have to go
in order to get inflation under control.
And while headline inflationhas come down, um, that is
not true about core inflation.
It's been very stubborn.
Now, part of that's housing.
Uh, and in the CPI, that'sa pretty good chunk.
(10:25):
Like a third, uh, comes fromhousing that, that will flatten out.
We'll start to see some.
Reduction in the contribution ofhousing to inflate underlying or
core inflation, but, uh, the restof it is still stubbornly sticky.
So, um, 1 of the issues withmortgage rates, they ran over 7
(10:47):
percent and things sort of stopped.
And then what you saw is people offering2, 1 buy downs and some other issues.
That was because nobody believed that whenthe Fed reversed policy, any MBS backed
by 7 percent mortgages was going to bethere for more than a very brief time.
(11:08):
So prepay risk.
Led to that 2 1 buydown situation wherepeople could get the, uh, the rates
on an MBS back to where they thoughtit would last for a little while.
Yep.
The second thing that's going on inspreads, which are historically wide,
particularly the secondary spread is,uh, in addition to the prepay issue,
(11:32):
if there were going to be a recession,which we have a mild recession,
our forecast that raises risks, sothere's a change in the risk premium.
So you have to add that in there.
I think there's also a search inthe market and capital markets for
who is going to replace the Fed.
So the Fed holds 21 percent of mortgagebacked securities outstanding, the
(11:54):
single biggest holder in the world.
Um, the combined depositoryinstitutions, banks, uh, and credit
unions hold about 29 percent as a group.
But as a single holder, the Fedis the biggest and they have
said, we don't want any of this.
We would like it to go away.
That's a, that's a formal policystatement that they would like to
(12:15):
exit, uh, have MBS exit the portfolio.
So the question is, who replaces them?
So the thrift industry is gone.
The depository institutions have, Overa very long time period, he held those
in a, in a band, which they, they neverexceed a maximum share of the assets held.
(12:38):
And they never, they're neverlower than a certain share.
They're pretty close to the topof that band at the present time.
So who steps in and replaces them?
And I think there's a significantuncertainty in the market about that.
And that widespread is in part, asearch for who's going to replace that.
Dale Vermillion (12:57):
Interesting.
Doug Duncan (12:57):
We're doing some research on that.
People will say different things.
They'll say, well, private investors.
Okay.
Uh, maybe so, uh, at what yield willthey be willing to hold that volume?
Uh, and how will they behaveover the business cycle?
Will that, will there be a morevolatile holder, a less volatile holder?
(13:21):
You know, the fed wasnot an economic buyer.
They were a policy buyer.
So they weren't buyingfor risk return metrics.
They were buying to impact thefundamentals in that, in that business.
That's not why private investors invest.
They're looking at, uh,yield risk adjusted returns.
(13:42):
So that's a kind of a big unknown.
And I think that part of what yousee in those spreads is the search
for what's going to happen next.
Dale Vermillion (13:52):
And that concern the Fed has about the mortgage backed
securities is it just because they'reconcerned about the stability of those
funds is really what it comes down to?
Doug Duncan (14:01):
Well, I don't, I don't think they're worried about,
um, the value of the MBS or thehealth of the MBS themselves.
In fact, that's one of the thingsthat's different in this current
banking, uh, issue that we've hadthat's different from 07 to 09.
You know, seven Oh nine, itwas really an asset quality.
Yeah, that's exactly right.
Case today, treasuries are solid.
(14:22):
The MBS are solid.
They just don't want to be interveningin the market, uh, by being a buyer in
a specific sector, they've taken somecriticism for, for that in the past.
And that's why they traditionallyhold only treasuries.
Uh, so they would like to get back outof that space and, and, uh, have the
market perform more on fundamentals.
Dale Vermillion (14:44):
So you said a couple of things there that
I thought were really key.
Um, first off, you said just aminute ago that this is not two 7,
008, uh, 2007, eight, nine, and 10.
And a lot of people ask that.
I hear that all the time from people.
Are we going back to2007, eight, nine, 10?
My answer is always like, no,that's a totally different problem.
Totally different issue.
It was, it was more asset basedcredit, quality based those kinds of
(15:07):
things where this is just economic.
It's just based on rates and what'shappening, which is more cyclical.
Okay.
And it's going to change.
And I loved when you said earlier,Doug, and I think this is a good
reminder for the industry that, youknow, we're so quick to say, Oh my gosh,
rates went up so much, that's so bad.
And we forget it actually landedmuch better than it could have.
(15:27):
And it probably should have, we actuallydid way better through that process.
We're still seeing.
Pretty good production out there.
I know for my clients, many ofthem are doing very, very well.
I've got clients who actually are doingbetter in 2023 than they did in 2022.
And that was better than 2021, believeit or not, when it was a record
year, but they understand the market.
(15:48):
They, they understand what's happeningaround them and they're making changes
to separate themselves in that market.
So I love the fact that you talked aboutthat to remind us, we should be grateful.
We're in the industry that we're inand it's responded as well as it has.
And this is just another phase we'regoing through that we've got to deal with.
Let's talk about housing for a minute.
(16:08):
Tell me what you see as a long termprognosis for housing down the road.
Um, I know you just said thatyou're thinking, you know, at one
point it was a 10 percent drop.
Now you're cutting that ahalf to a 5 percent drop.
What do you see in the next, let'sjust talk the next three years.
What do you think real estate'sgoing to do from a value standpoint?
What do you thinkinventory is going to do?
That's the biggest concern andheartburn for lenders today.
(16:31):
Cause we.
We do, we have the biggestdemand we've ever seen.
We've got population numberson our side for Gen Y, Gen Z.
When you look at that was 168 millionpeople in those two generations.
That's a huge population thatultimately will own home someday.
Um, tell us a little bit moreabout that, if you would.
Doug Duncan (16:49):
Yeah, the, um, uh, from the very big picture, people
ask me why I've stayed in thereal estate space all my career.
Dale Vermillion (16:58):
I can't wait to hear this.
Doug Duncan (17:01):
It's a real simple, you'll find I'm actually a pretty simple guy.
Um, the, it is true that every humanbeing on the planet puts their head
down every night on a piece of realestate somewhere, it's part of the human
condition, so, you know, depending on.
(17:22):
Population, wealth, income, risks.
There's a whole bunch of waysthat can play out, but it will
always be part of this story.
And so it is to me endlesslyinteresting from that perspective.
Dale Vermillion (17:35):
Yep.
Doug Duncan (17:35):
The, the, um, uh, there's a variety of things that are going on.
You, you, um, uh, mentioned thedemographic side, the demand drivers.
So, coming out of the 07 09 time period,there was this theory that, uh, the
millennials had learned from their parentsexperience in the foreclosures, and they
(17:59):
were going to want to rent 300 squarefoot apartments with, uh, amenities.
And so, there were all these stories ran.
So, we started a survey of 1, 000households a month in June of 2010,
and we continue it to this day.
It's been very useful.
In that first month survey, June of2010, 92 percent of millennials said
(18:21):
they eventually want to own a home.
They were like, so how do youexplain the news stories who are
not talking to the millennials?
And so what the, what the reporterswere seeing was that the jobs, which,
uh, which the millennials were takingwhen they were coming out of school
and whatever, Led them downtownbecause this was the most urban centric
(18:48):
economic expansion since World War II.
So if you were going to have a job,you had to have an apartment downtown
because that's where the jobs were.
So it wasn't that you wanted theapartment, you wanted the job.
That's right.
So what they were, what theywere telling us was when our
economic position improves.
(19:08):
We eventually intend to buy ahouse, but we're going to this
job has to grow an income.
We have to get our credit in shape.
We'll probably get married.
Uh, and and that's that point.
We'll look into moving to a placewhere we can afford and buy a house.
So, no generation is any differentfrom the other as far as we can tell.
(19:29):
In terms of the demographics.
So then it's a question of how manypeople there are, how many households
they form and the millennials arethe biggest generation we've ever
had, even bigger than the boomers.
So, but then the boomers play a roletoo, because they have something on the
order of an 80 percent home ownershiprate and they're going to age in place.
(19:50):
And so that, those propertiesdon't come, uh, come back into
the market They, the boomers startto pass on in a couple of years.
The leading edge of the boomers turns 80.
So that life expectancyis, uh, shortly after that.
So over time, you'll see some of thatcome back, but of course then the gen
(20:13):
Z's are coming in, however, that'ssupplemented by immigration that will
continue the demand curve on that side.
So a lot of it is left, uh, in the, inthe, uh, In the field of the builders.
And um, when we said in 2014 we offof our survey combined with some
(20:37):
demographics, we said actually the problemgoing forward is going to be supply.
And people thought we were crazy 'causewe'd just come off this, uh, this
crazy times foreclosure and stuff.
And they're like, youguys, you're kidding.
You really think that, wellnow everybody's in that camp.
But what had happened was wewent from building about 1.
(21:00):
6 million single family detachedhouses at the peak in 07 to 400, 000.
In other words, we destroyed threefourths of the supply chain, and then we
stayed there for three and a half yearsbefore construction started to pick up.
All that three and a half years,the millennials were aging, and they
were moving closer and closer towardThe point when they would start,
(21:24):
uh, driving the demand curve andthat happened in probably late 2015.
Uh, and since then they've reallybeen the driver, uh, as they've moved
toward peak home buying age, whichis still a couple of years from now.
So, but the, the builders byand large, historically had
built to the move up buyer.
(21:46):
And so when you went into a buildershowcase, they were showing you options.
Like, you know, you could have granitecountertops or finished basements or, you
know, other attributes that representedthe equity you were taking from your first
home and making your next home nicer.
Well, entry level people needbedrooms, bathrooms and a garage
(22:09):
and not much more than that becauseaffordability is their biggest challenge.
Dale Vermillion (22:13):
Right.
Doug Duncan (22:13):
That's not really what the builders were targeted toward.
And so it took thebuilders a little while.
To learn how to position themselvesto meet entry level demand as opposed
to move up demand, which there wasstill move up demand, but there,
there was more entry level demandthat they had faced in the past.
So they're getting better atthat, but it's still today with
(22:36):
the boomers, aging in place.
And when the, with the Gen X folks lockedin with those 3 percent mortgages, It's on
the back of the builders to build supply.
Uh, and so builds are doing very well.
Um, uh, because demand, uh, uh, as yousaid, demand is strong, even though
(22:56):
mortgage rates have risen to over 6%.
A little history here.
If you go back to World War IIand you track the 30 or fixed rate
mortgage rate, About 6% is theaverage over that whole time period.
So it's not, it's only a shockbecause we went from 3% Right, which
no one should have ever expected.
That's right.
to back to normal.
(23:17):
But it felt like a, a real problembecause the shift was so big, but it
just got us back to the historical norm.
Dale Vermillion (23:24):
Yep.
You sound like you're,you sound like me now.
I keep talking to everybody and sayingthese, this is not an abnormal rate.
This is the normal mortgage industry.
It just feels like it because we're soclose to those low rates that we had.
So let me ask
Doug Duncan (23:37):
you,
Dale Vermillion (23:39):
yeah,
Doug Duncan (23:40):
refinance down to eight and then refinance down to six.
Dale Vermillion (23:43):
Well, I started in 1983 and rates were 17 and a half on a mortgage
when I was selling them in that day.
So, you know, These ratesdon't seem too bad to me.
Um, yeah,
Doug Duncan (23:54):
I'm going to pretend like I read that in the history book.
And I wasn't there.
Dale Vermillion (23:59):
I love it.
Um, so, you know, you hear talk aboutthe quote unquote, silver tsunami, uh,
this thought that, you know, the babyboomers will die off at a point where
we'll have a lot of real estate available.
Is there any, is there any truth to that?
If so, what, what is that going to happen?
When do you see that andenvision that happening?
Doug Duncan (24:20):
Well, actually, I have a 2 or 3 longer term research projects
that I've got staff working on.
One of them is that question.
Dale Vermillion (24:29):
Okay,
Doug Duncan (24:30):
but so what did what did the boomers do with the
equity in their home in late life?
Because, as I mentioned, they haveabout 80 percent of ownership rate
and not all of them have the savings.
To maintain the lifestyle that they want,or to support later life difficulties.
And so there is a question of how does thehousing, uh, equity play out into that.
(24:56):
Um, I don't have a solidanswer for that yet.
People, a lot of people, uh, we'lltalk about reverse mortgages.
We've done some, uh, focus groupswith, uh, older households.
They're like, you know what,we've paid the house off.
This is, we're going tostay here in this house.
We don't like reverse mortgages becausethey're, they're not efficient and they're
(25:19):
not really part of our financial plan.
So, you know, conditions changeand force people to make.
To make changes.
Um, so we'll see how that plays out.
And there, that number ofpeople is growing very rapidly.
I've seen, I haven't done the calculationmyself, but I've seen estimates of 10, 000
(25:40):
people a day, um, passing the age of 65.
Uh, that's a lot of people.
Uh, and when you think about 80 percentownership rate in that population,
you get, that's a lot of houses.
As well.
So I think that's a kind of an openquestion, uh, which we're trying to see.
Is there anything we should be doing asa company and thinking about enabling
(26:03):
them to, to continue in that space?
Um, or thinking about transitions,some way to help them liquefy equity.
If that's a, an issue that they would liketo pursue, we're just trying to understand
what they want, what they will need.
mismatch between there and isthere something we should be
thinking about doing to help?
Dale Vermillion (26:23):
Yeah, well, that's really interesting because, you know,
reverse mortgages have, have really hada pretty difficult time for the last 10,
20 years, um, in creating any traction.
Uh, I think part of that's justbecause people don't understand them.
I think part of that is because, uh,they've seen some cases where they
felt like, you know, they, they maybepeople lost out because of that.
(26:44):
But a lot of that is just becausethe demographic wasn't there.
So, For lenders today, that's probably agood additional product to have in your
portfolio going forward, because therewill be a time I think when that's going
to become very viable, especially ifwe see some changes in the way reverse
mortgages are set up and they make them alittle easier for consumers and a little
(27:05):
bit more protection in those things.
I think it'd be really great.
Um, talk about, talk about the.
The new construction, because we'restarting to see more building again.
I know that, you know, as I travel around,I see it more and more than I did for a
while, there was nothing happening andyou know, 2008, nine, 10, 11, 12, 15.
We're starting to see it again.
How fast do you think we can expect?
(27:26):
To see housing start to catch up throughnew construction and through building,
especially because like you talkedabout, you know, the biggest challenge
we've got is getting affordable housingfor these, uh, gen Y, gen Z that we're
dealing with right now that they justcan't afford the 450, 500, 550, 000
homes that are so common out there.
Doug Duncan (27:47):
Yeah.
Um, so we are, uh, we are seeing a strong.
Stronger than expected, let me say thatstronger than expected construction.
Good, simply because there is ashortage relative to demographics.
(28:08):
It depends on who's estimates andwhat kind of properties are including
somewhere between 2 and 4M units.
Of single family homes and apartments.
Are needed to catch up to the demographicdemand and that takes a while.
So, uh, uh, you know, there's,there's ongoing growth.
(28:29):
That's the catch up partplus the ongoing growth.
So thinking that this is going tohappen in the next two or three
years is probably really optimistic.
There's, but, but it doesmean there will be strength,
particularly on the purchase side.
And that's, that is one thingthat those companies who
looked ahead beyond the refly.
(28:50):
The business in the pandemic and said,well, there's stability and strength
in the purchase side of business.
So I'm going to make sure I'min the business to help people
buy homes, to live in them, notrefinance their existing home.
Those firms are doing fine.
Uh, that, that's a solid business andwill be for the foreseeable future.
(29:10):
Um, so the builder is going todo what they can to get there.
One of the things that is happeningIn some locations is a recognition
by local jurisdictions thatthey need to ease development
concerns and zoning situations.
To allow the constructionof affordable housing.
Good.
(29:31):
There's not it's it'sa local issue, right?
It's not something you can pass alaw in Congress and make it happen.
It's got to be jurisdictionby jurisdiction.
So.
You're seeing signs of that recognition.
I wouldn't say it's a bigthing yet, but it is growing.
You've seen things like the.
Accessory dwelling units discussions and.
(29:54):
Uh, so, uh, some infill, uh, permissions,uh, being offered, some things like
that, that needs to continue, uh,in, in order to, to, uh, improve
supply, especially affordable supply.
Uh, my, um, sense of where the financingpiece is going to be, particularly
(30:17):
interest rates, I don't think you'llsee a whole lot of change in credit
criteria from where we are today.
They're pretty stable.
The loans that are outthere are pretty good loans.
A little bit of an uptick in FHA.
Part of that is that when rateswere at 3%, people were refinancing.
(30:38):
The higher quality borrowers thatwere already in the FHA portfolio were
refinancing out, getting rid of theMI and getting a conventional loan.
Which on average raised the delinquencyrate in the FHA portfolio as
those better credits financed out.
But that's kind of the only thing thatyou're seeing on the quality side.
The, uh, a question is, um,uh, the condition on the Fed
(31:06):
getting control of inflation.
So if we assume the Fed getsinflation back to their target,
then what would you think rateswould be in a normal housing cycle?
What I'm telling people is if theCongressional Budget Office, which
makes the official estimate of potentialGDP is correct, they're thinking right
now, uh, real growth of around one andthree quarters percent might be normal.
(31:32):
Then that 6 percent mortgagemight be at the high end.
And so, uh, when, uh, the, when, um,The 6 percent was the average 30 year
fixed rate for a very long time period.
The U.
S.
was growing at about 3 percent annually.
And so, or two and three quarters.
So if you drop that a full percentagepoint, you would think that the
(31:54):
run rate of real interest rateswould be at a lower pace as well.
So I'm, what I'm saying is if thatlogic holds, then you might expect
over the, the, the business cycle.
Mortgage rates to run from fourand a half to 6 percent with maybe
a central target of five and aquarter or something like that.
(32:16):
I don't, I don't know.
That's not solid science.
None of us know
Dale Vermillion (32:21):
that's right.
Doug Duncan (32:23):
But I think that's a logical, you can make a logical construct that will
get you to that, which is pretty good.
Dale Vermillion (32:29):
And that's within what timeframe?
Doug Duncan (32:32):
I would say over the typical expansion recession is maybe
6 years or something like that.
So there'll be a little bit of a refiopportunity if, if the deployment
of technology does ultimatelyimprove efficiency for lenders.
That, uh, the, uh, and in the market thatthe, uh, the margin by which borrowers
(32:57):
need to see rates falls, maybe goes backto something like 50 or 75 basis points.
There'll be some minor refinancewaves, uh, in opportunities in there,
but really if you're in the mortgagelending business, being in the business
to lend to people to buy a house,that's the sustainable long run.
Dale Vermillion (33:18):
You know, one more question I want to
ask you about the builders.
How much is the supply chain issues stilla factor in that growth that we're seeing?
And the other thing is just the workforcechallenges that are out there today.
You know, it seems like everybody talksabout it that nobody wants to work.
You know, we know that that's nottrue, that nobody wants to work.
But we are seeing an awful lot ofchallenges in The workplace with
(33:40):
people being able to hire employeesand maintain them and keep them.
I know the construction businessreally struggles with that.
How much of a factor those two play inthis growth and the speed of the growth?
Doug Duncan (33:52):
Um, well, if you watch the surveys of builders, skilled
labor is always sort of the topof the things that they need.
Uh, that goes back to the crisiswhere we went from building 1.
6 million units to 400, 000.
That meant three quarters ofthat labor that was in there was
(34:13):
unnecessary at that 400, 000.
And it was there for threeyears, three and a half years.
So that labor went somewhereelse and found a home.
So it takes time to build skills thatgeneral labor is not so hard to find, but
skilled labor is what, uh, what they'vebeen saying consistently for years.
(34:38):
Um, so that, that's a challenge and willcontinue to be, uh, to be a challenge.
And I know there's some places that areturning to building some, uh, skilled,
uh, trades, uh, some of the tradesare, are running schools and training
programs to try to help, uh, bringsome of that labor in other materials.
(35:00):
Um, At the outset of the pandemic,they shot through the roof, um,
Lumber has come back, it's stillsensitive to pickups, sudden pickups
in demand, and so it's probably notas stable as it was for a long period.
There's volatility.
There are still some components, whichare maybe more complex to produce.
(35:24):
That were the, they're still, uh,higher cost than what they were
prior to the pandemic, but the, thesupply is just for the pandemic had.
Uh, emerged from a couple of things.
1 was when we lost 20Mjobs, the builders are like.
(35:44):
Who's going to buy ahouse in that environment?
And so they immediately.
Pulled back on their construction plans.
And that was exacerbated by the needfor them, if they retained the labor,
to protect it from a health perspective.
So they had to figure out how we'regoing to do this in a way, if there
is going to be demand for houses, howare we going to do it in a way that
(36:06):
we protect our labor forces health.
That took a while.
It was maybe four or five monthsbefore you started to see the
resumption of construction.
That four or five months, Themillennials were receiving, some of
them receiving paychecks, even thoughthey weren't going to work through the
paycheck, paycheck protection program.
(36:30):
So the demand side kept going and we werealready behind the curve on supply and we
got another four months behind the curve.
So those things kind of compiled.
Uh, like I say, some of the supplythings have been, uh, have been,
uh, Improved, I wouldn't say solvednecessarily, but have been improved,
(36:53):
but they're still, uh, costs are stillaccelerated beyond what they were.
And you can see that in the margins,the public builders, they've been
doing very well in this time periodfrom a profitability perspective
because demand has been very strong.
Um, even though affordability wasconstrained, those, uh, The, uh,
(37:16):
financially stronger millennial householdswere absolutely making the move.
And one of the things that, youknow, if interest rates six and a
half percent today, some of themare, you hear this phrase, uh,
date the rate and marry the house.
(37:36):
I didn't see a cartoon the other day thatshowed a realtor You can see the door was
open and there was some patches on thewalls and there's a couple standing there.
And she says, well, thisis a real fixer upper.
How's your marriage?
I love the builders.
You can look at the public builders,earnings reports, and you can
(37:59):
see they've been doing very well.
Demand is very strong, eventhough we've seen that range
Dale Vermillion (38:04):
shot.
Yeah.
Well, you know, I'm wearing a back tothe future t shirt because that's been
our theme this year, Doug, uh, mortgagechampions with our clients all year
long is to succeed in this market.
You got to go back to thebasics to succeed in the future.
We're, we're back to a traditionalmarket, six to 7 percent rates.
We're, we're fighting that battleof, you know, the consumer mindset
(38:24):
is I'm still looking for threeand trying to convince them.
That's not coming back anytime soon.
So here's the deal.
You got, you got to determine what canyou afford in this kind of environment
today, because it is the new norm.
There's no question about it.
I think the last year and a half hasbeen difficult for everybody because
consumers and lenders alike, I thinkwe're both sitting, holding their
(38:45):
breath saying, okay, is this goingto change and go back to what it was?
And, you know, guys like you and I weresaying, Nope, it's not, it's headed
north and it's going to stay northfor a while because we, we needed a
correction for all intents and purposes.
Didn't really want to seeone quite this dramatic.
Uh, but nonetheless, this isa more normal marketplace.
(39:07):
So, you know, it's, it'salways amazed me, Doug.
One of the things that I, that I love themost about you is that you're an economist
who knows, you know, So many things aboutso many parts of the economy, yet you
understand the mortgage side and whatlenders are dealing with and how they work
because you're so involved and you speakat so many conferences in the industry.
(39:29):
So if I could ask you this last question,um, from your perspective, first off,
what do you think lenders Need toknow the most today about the market.
And then what would be yourrecommendations on what they can do?
Lenders, loan officers, peoplein the business to just do
(39:49):
well within this marketplace.
What are some of the blind spotsthat you can help them uncover?
Doug Duncan (39:56):
Um, well, I think that they, they need to be realistic to borrowers
about where the numbers are going to be.
Um, I think.
Even if it's tough news, you're better offbeing seen as an honest player, telling
them the truth, what they're getting to.
(40:17):
Uh, people ask me on the consumer sideis now a good time to buy a house.
And my first statement is if youhave a family budget and I'm, that's
actually what I'm trying to get atis you should have a family budget.
And then you take thatinformation from that, then you're
sitting across from a lender.
Who knows you're educated on yourown financial characteristics.
(40:39):
And there's not, there's notuncertainty about what you're
going to be able to call it.
Great
Dale Vermillion (40:43):
advice.
So,
Doug Duncan (40:44):
so you haven't just for both the lender it's a much better
situation, uh, to, to get there.
So there's that, uh, if you're, um,Investing in technology, I would spend
a little time thinking about whetherthere are implications for your business.
From the fact that the reason SiliconValley bank was taken into bankruptcy
(41:11):
on a Thursday in the middle of theday was because 42 billion of deposits
flowed out of that bank in six hours.
Traditionally, the FDIC closes,the bank closes on Friday.
It's taken over over the weekend.
It's restructured and Monday it opens.
They went on a Thursday afternoonbecause of that massive outflow
(41:35):
that was enabled by technology.
So I don't, there's not a directapplication to mortgage companies,
but you need to think about what'sthe role of technology, both
from the consumer's perspective.
And from your perspective, in termsof economic efficiency, and are there
things that you might not have consideredin your operations, where the, that
(41:59):
speed issue and mortgage banks hasalways been a speed issue, right?
It's a closing.
It's always been, there were a couple ofpeople that left Fannie Mae a couple of
years ago, went to a mortgage company.
They thought they sort of knew everything,uh, uh, that they were going to need.
And I said, Because I'd worked atNBA, which was a great experience.
I loved that.
(42:20):
Still do.
Uh, I learned so much.
I told him, I said, you haven't heardthis at Fannie, but it's a speed business.
Two years later, I saw them at an eventand they were like, it's a speed business.
So, so I would give a littlethought, a little thought to that.
(42:41):
Uh, and then I, as always.
I'm making loans to people who arebuying houses to live in them and doing
in such a way that when such time as anopportunity comes for them to improve
their loan or buy another house, you're inposition because you're a trusted party.
I think there's theirtrust is always valuable.
(43:04):
So whatever you can do to build trust.
You
Dale Vermillion (43:07):
know, you just said three of my favorite things there.
You talked about budgets.
I have never been a fan since it startedover two decades ago of using DTIs as
a calculation for approving a borrower.
We used to do a budget on aborrower back in the eighties
when I started, and you literallyweren't making a loan to somebody
unless they truly could afford it.
We didn't use a calculationof gross income.
(43:29):
We went to net income and reallylooked at what they're doing.
And one of the things I adviselenders all the time is.
Have a good budgeting tool thatyou can have your customers use.
So you separate yourself from yourcompetition and you give them something
where they can go into that homefeeling good about what they're doing.
Um, you know, I do, I do, I do radioprograms all over the country and
that's the first thing I say every timepeople say, well, what should I do?
(43:50):
When I get a mortgage first, doyour budget before you do anything.
Don't go in closed eyed to that.
And I loved when you talked about thetechnology piece, because the mistake
that I keep seeing in the industry withtechnology is we don't use it for what
it's intended for, which is, uh, creatingefficiency in your process and having
a good process of understanding, youknow, following your customer through
(44:14):
the process, what we do instead is wetry to use this as a relationship tool.
We try to use it as the waythat we have people apply.
And because of that, you don't havetrust and loyalty because all you're
doing is you're doing everythingthrough a technological mindset.
Here, let me send you a link,fill out an application.
We'll give you a quote.
Okay.
Well, your quote can be beat by anybody.
(44:36):
We already know that.
And if you don't, if that borrower doesn'treally know who they're working with,
trust them and have loyalty to them,there's no reason for them to go with any
higher rate than the lowest out there.
At that point, the only way youcan really do well is by using that
technology alongside relationshipand, and do both together.
(44:57):
So I love those closing comments.
Um, so let me ask you the,the, the last question.
I saw my, guests and you and Italked about this a couple weeks ago.
I love to hear about mentors andwho's been mentors in your life.
You mentioned one earlier, um,from the MBA that you had, um,
Louis Knight, I believe you saidwas one of your, uh, mentors.
(45:18):
Uh, but I know you'vehad several in your life.
Tell me about those and how muchyou think mentors matter, uh,
in the business world to people.
Doug Duncan (45:28):
Um, When I was appointed, uh, chief economist at
MBA, I got a call from Felix Beck.
Uh, this will be a,I'll butcher his voice.
Your forecast is all wrong.
I'm like, Oh my gosh, thisis one of the Godfathers.
(45:49):
Well, turns out, I don't knowwhy he chose, but he chose.
To, to do that and did it consistentlyfor a long period of time to help me
understand how I can help lenders, uh,understand how a forecast should play out
in their, their planning for the company.
(46:10):
So Felix, uh, he, you know, goodLord, he, he's was involved in a
hundred things, but he took the timefor this rookie forecaster to, to
lean over and tell me, look, here's.
Here's some things to learn.
Uh, and one of the great privileges ofmy life when he retired from the chase
board, he was, uh, uh, offered to, uh,they, they asked him to bring a guest
(46:36):
and he invited me to come as his guest,one of the great honors of my career.
Um, Andy Woodward, uh, is another one.
Uh, And the MBA was goingthrough some turmoil.
There was some frustrations.
He received that.
He said, you know, I need you to comedown to South Carolina to, uh, will end
(46:59):
in my place, spend a weekend with me.
I want to talk to you about how, how thewhole industry works over the long run.
See if I can help you get a littleperspective on today's problem versus.
Uh, things that have happened before.
I, I don't know why he chose to investin me, uh, but another great privilege,
another person of, of immense respect.
(47:21):
Um, so it, it does matter.
Uh, it takes two things.
One is you have to be open to it asa person to someone mentoring you.
And the second is if you are aperson of experience, you also
have to be open to finding someonethat has potential that can be.
Develop and offer to them theopportunity of your experience, uh,
(47:46):
and with no expectations of anything.
I've had a couple of chances to passthat on to other people and it's really
rewarding to see that happen, uh, uh,in, in someone's life that, that, that
there's another level that they get to,uh, It's not, it's rarely financial in
(48:09):
nature, at least that's my experience.
It is maybe different for someother people, but it's satisfaction.
It's the, the pleasure of, uh,the relationship, but also the
benefits of that relationshipand your ability to contribute to
other things that you're doing.
So I'm, I'm a believer in it.
I don't know that it, some peopletry to structure it in my experience.
(48:31):
The structure is kind of emerged.
No, that's right.
Uh, whatever makes sense emerged.
Uh, so I don't, try not to overthinkit, but, um, we don't, uh, we have a,
a development process in my, that's notspecifically mentoring in my group, uh,
but we have a development process of fourpeople across the course of their career,
(48:56):
uh, which we focus on specifically.
Um.
To help them go to the next step andsometimes the next step for them is
outside the company, not because wedon't want them, but as you know,
every company is kind of a pyramid andthere's only so far some people can
go within that pyramid, but we wantthem to go out as an advocate for us.
(49:19):
Having grown in the timethat they were with us.
Uh, and that makes it easierfor us to recruit you can
go there and work for free.
Five or six years, you reallymake progress on your career and
then move on to something else.
And then they tell someoneelse, I went there first.
That's a good thing to work with.
Yeah, it becomes a recruiting tool.
Dale Vermillion (49:39):
Great message, not only for individuals to find a wise mentor and
be open to them, but for lenders, that'sa great message to help people understand,
help lenders understand out there.
If you build a mentorship programwithin your organization, if
you build a program where peoplecan move up through the ranks.
You're going to really havegreat employees who are very
(49:59):
loyal to your company and willstay around for a long time.
I've seen that my whole career.
I mean, I've, I've worked with over 700lenders in my career and the ones that
stand out in my mind are the ones whoreally took that to heart and really
built a culture around that wheretheir, their whole focus was personal
growth and professional growth fortheir people and all that they did.
So I appreciate you saying that.
(50:20):
Well, Doug, this has been so much funand it's no coincidence you're wearing
a white shirt because you're justone of the good guys in the business.
I, I appreciate you so much.
I admire you.
I respect you immensely.
I'm super honored that you took the timeout of your busy schedule to spend with
me today, uh, on betting a thousand.
And I want to thank you somuch for that opportunity.
(50:41):
Oh, my gosh.
Doug Duncan (50:42):
You're widely respected within the industry.
So it's a privilege.
I
Dale Vermillion: appreciate that, my friend. (50:46):
undefined
Thanks for being with us and, uh,thanks for all the great advice.
And we'll look forward to seeing youguys on the next batting a thousand.
Thanks guys.
Batting a thousand is a productionof Mortgage Champions, a company
that's been transforming the peoplewho transform companies since 1995.
Have a suggested topic or guest?
(51:07):
Contact my team on Twitter.
That's @dalevermillion or tweet ususing the hashtag Batting 1,000.
That's #batting1000.
It is true that every human being on the planet puts
their head down every night on apiece of real estate somewhere.
It's part of the human condition.
So now, you know, depending on population,wealth, income, risks, there's a whole
bunch of ways that can play out, butit will always be part of the story.
(00:24):
And so it is to me,
Voice Over (00:33):
you're listening to batting 1000 with Dale Vermilion,
where heavy hitters from mortgage,real estate, and business share their
secrets for lasting success with yourhost award winning sales strategist
and industry icon, Dale Vermilion.
Dale Vermillion (00:48):
All right.
Welcome to this month'sbatting a thousand.
Uh, I am so excited to haveyou guys with us this month.
And I've got an absolutely incredibleguest, uh, good friend, uh, a man that
I have admired for a lot of years.
I've, I've watched him, uh, on the stageso many times over the last 15 years, uh,
speaking to the mortgage industry, um,probably longer than 15 years, actually.
(01:10):
Uh, Uh, Doug Duncan is with us today.
If you don't know who Doug is, uh,I'm sure you do cause he needs no
introduction, but let me just giveyou a rundown on Doug's credentials.
By the way, Doug, I could spend thisentire time just talking about your
credentials, but I'm going to give themthe one that the ones that I've, I've
written down that they want to know.
Uh, Doug is a senior vice presidentand chief economist for Fannie Mae.
(01:30):
Uh, he was previouslywith the MBA before that.
He's responsible for the forecastanalysis of the economy and the
housing and mortgage markets.
There is nobody that knows thisindustry better than Doug does.
Uh, he oversees in his position, strategicresearch regarding potential impact of
external factors on the housing industry,and just a couple of cool things.
Uh, Doug is a Bloomberg businessweek, 50 most powerful people.
(01:53):
People in real estate.
That's a huge accolade.
He's also in the News's 100 mostinfluential people in real estate.
And underneath his leadership, uh,Fannie Mae's Economic and Strat Strategic
Research Group earned the 2022 Lawrence R.
Klein Award for blue chip.
Forecast accuracy.
Uh, they also won the NABE Outlook Award.
(02:15):
Uh, that's, you guys are the firstrecipient of that, um, that did it back to
back years, which is a really cool thing.
That's the first time in history.
And he is a trustee of North DakotaState University, PhD in agriculture
economics from Texas A& M, whichmeans I need to call you Dr.
Duncan, and he has a BS andMS in agricultural economics
from North Dakota State.
So Doug, great to have you.
(02:36):
So honored to have you here.
Doug Duncan (02:37):
Great to be with you.
It's.
It's a, it's a pleasure.
And, um, just to be clear, all thoseawards are because I have a great staff.
I try not to screw it up.
Dale Vermillion (02:48):
I love it.
Well, look, we want, we want to talk,uh, obviously everybody wants to know
what's happening with the marketplaceand you and I chatted a little bit.
And I want to talk about, you know, therecent trends and why the rates have
not responded the way they normally doin the market and some of the things
that have been factors that have driventhat and kept rates up a little bit.
(03:08):
The forecast for what you see and mortgageand real estate and housing and all that.
We'd love to hear that.
But you and I were having alittle conversation backstage and
you'd mentioned something that Ireally would like to start with.
And you were talking about whatthe biggest problem is that chief
executives have in the mortgage world.
So share with me your thoughtson what we were talking about,
because I thought that was a greatway to start this conversation.
Doug Duncan (03:30):
Yeah, sure.
I was trying to understand when I wasfinishing my, my degree, what, what's
the value that economists can providein the executive office and in my
first couple of years at NBA, as I wastalking to some of the leaders, uh,
became clear that really their challengeis to understand trend and momentum.
(03:53):
Where is activity in their businessand the environment in which
their business gets executed?
Where is that activity going?
And then at what speed?
So you may, you may choose to say, well,we don't necessarily agree with the trends
today, but you should know what they are.
And have a good reason for why you arerelative to that trend where you are.
(04:18):
And like, likewise, um, whether you areat speed with the trend or behind or
ahead, those things that seem to me areimportant because it, it determines where
you're gonna allocate your resources.
Uh, and there's always risk to manage.
Uh, and understanding those thingswill give you some insight into
(04:39):
the, the risks to the, to the, uh,objectives that you're trying to pursue.
Dale Vermillion (04:45):
Now, if you would share the, analogy that you gave me, uh, when
we talked earlier about that, uh, fromback in your, your naval days, talk
about that for just a minute, becauseI thought that was a great analogy.
Doug Duncan (04:54):
Yeah, it was, uh, it's always one, one thing that my father
taught me when I was growing up was justpay attention to everything that you do.
You may not be what you alwayswanted to do, but you're going to
learn something if you're payingattention, no matter where you are.
So I was in the Navy, I was anenlisted, uh, petty officer, uh,
and from time to time I would standwatch and keep the log on the bridge.
(05:15):
Uh, and as I watched the, the captaingive orders in, uh, in directing the
ship, it was clear that whether youwere in a fog bank, Or you were in
bright, clear skies, you were going tokeep the ship going, no matter what.
And if you're in a fog, you don'tnecessarily know what's out there, but
you can't just stop the ship, right?
(05:36):
And that's a lot like running a company.
And maybe today there's, there'sa lot of uncertainty about where
the housing sector is going to go.
You can't not go, and you have to makesome decisions, uh, and, uh, actually,
there was Early in my days at mortgagebankers, uh, Leo Knight, who many
of you probably knew, uh, called meand he asked me, he said, dog, I've
(06:01):
got a board meeting at five o'clock.
He said, I have to makea decision on this issue.
I understand you're anew economist at MBA.
Maybe you could help me with this.
And so he told me, I don't evenremember what the issue is.
He said, just call me back at threeo'clock and tell me what you think.
So I looked at a bunch of things.
I'll call them at three.
And I said, well, if I look at this,it says, uh, this might be a good idea,
(06:22):
but the data is kind of iffy and I lookat it with a different set, uh, gives
a little bit different indication andthe data is not perfect there either.
And he stopped and he said, Doug, thedata won't be better by 5 o'clock.
He said, I'm just asking your opinionbased on your professional expertise.
How would you make this decision?
That was a really important lesson.
(06:43):
I've always been grateful for him doingthat for me because it, it brings it
clear, you have to make a decision,even though the data aren't better
when you have to make that decision.
Dale Vermillion (06:55):
That's really, that's, that's rich information.
Well, speaking of the fog bank, I think alot of lenders today feel like they'd been
in that fog for about a year, you know,year and a half now, since about early
2022 and, uh, particularly recently, itseems like, you know, rates have just not.
Followed and tracked and responded andthe bond market has the way it normally
(07:17):
does to inflation factors and those kindof things And I know there's a whole
lot of reasons for that between the debtceiling problem that we had and bank
crisis But i'd love to hear I mean nobodyknows these things better than you do.
I'd love to hear a little bit fromyou on Where we're at today why where
we're at today why rates are actingkind of Fickle and where you see things
(07:37):
going in the future with rates and withhousing and with the market, just kind
of give us a, an overview of what you'rethinking from an economist standpoint,
um, with all the data you look at,
Doug Duncan (07:48):
um, sure.
Um, well, as everybody knows, thefed met yesterday and decided not
to raise the fed fund started.
Yeah, but then they muddiedthe water a little bit by,
uh, their summary of economicprojections, suggesting they would.
Uh, at some point raise to 50 basispoints, they may do it in two quarter
(08:11):
point increments or something.
Um, which suggests that they think thatinflation is not yet under control.
Um, and we would agree from acore, uh, inflation perspective.
Well, typically when you get as big arate shock as was in the mortgage industry
where rates doubled within a year.
(08:33):
You would see a lot moreslowdown in housing than you saw.
There was an initial slowdown, butthen the reality of the pent up demand
from the millennials who are still acouple of years away from peak first
time home buying age and the lackof supply exacerbated by two things.
(08:55):
One is the boomers aging in place.
And the second one is the GenXers who don't get any airtime.
So I'm giving them some airtime.
Now they're the ones thatlocked in 3 percent mortgages.
So it's not going anywhere.
So that's a huge chunk of theexisting homes out there that are
really in a way taken off the market.
And so it doesn't take a lot offinancial power on the demand side.
(09:20):
For that, uh, in thisinstance, stabilized prices.
First of all, I think our view, ifyou went back six months was over
a two year time period, we probablysee a 10 percent decline in prices.
Now we've chopped that probably in half.
And we've only seen a couple of percentagepoints nationally, though regionally,
there are significant differences.
Dale Vermillion (09:41):
Right?
Doug Duncan (09:42):
But so, so rates that rise in rates actually hasn't caused the problem
that, uh, that a lot of folks thoughtit, of course, chopped off refinances.
There's, there's just only ateeny portion of households that
it makes sense to refinance.
So those numbers have dropped way off.
(10:03):
So the market is trying to assess, um,how far the Fed is going to have to go
in order to get inflation under control.
And while headline inflationhas come down, um, that is
not true about core inflation.
It's been very stubborn.
Now, part of that's housing.
Uh, and in the CPI, that'sa pretty good chunk.
(10:25):
Like a third, uh, comes fromhousing that, that will flatten out.
We'll start to see some.
Reduction in the contribution ofhousing to inflate underlying or
core inflation, but, uh, the restof it is still stubbornly sticky.
So, um, 1 of the issues withmortgage rates, they ran over 7
(10:47):
percent and things sort of stopped.
And then what you saw is people offering2, 1 buy downs and some other issues.
That was because nobody believed that whenthe Fed reversed policy, any MBS backed
by 7 percent mortgages was going to bethere for more than a very brief time.
(11:08):
So prepay risk.
Led to that 2 1 buydown situation wherepeople could get the, uh, the rates
on an MBS back to where they thoughtit would last for a little while.
Yep.
The second thing that's going on inspreads, which are historically wide,
particularly the secondary spread is,uh, in addition to the prepay issue,
(11:32):
if there were going to be a recession,which we have a mild recession,
our forecast that raises risks, sothere's a change in the risk premium.
So you have to add that in there.
I think there's also a search inthe market and capital markets for
who is going to replace the Fed.
So the Fed holds 21 percent of mortgagebacked securities outstanding, the
(11:54):
single biggest holder in the world.
Um, the combined depositoryinstitutions, banks, uh, and credit
unions hold about 29 percent as a group.
But as a single holder, the Fedis the biggest and they have
said, we don't want any of this.
We would like it to go away.
That's a, that's a formal policystatement that they would like to
(12:15):
exit, uh, have MBS exit the portfolio.
So the question is, who replaces them?
So the thrift industry is gone.
The depository institutions have, Overa very long time period, he held those
in a, in a band, which they, they neverexceed a maximum share of the assets held.
(12:38):
And they never, they're neverlower than a certain share.
They're pretty close to the topof that band at the present time.
So who steps in and replaces them?
And I think there's a significantuncertainty in the market about that.
And that widespread is in part, asearch for who's going to replace that.
Dale Vermillion (12:57):
Interesting.
Doug Duncan (12:57):
We're doing some research on that.
People will say different things.
They'll say, well, private investors.
Okay.
Uh, maybe so, uh, at what yield willthey be willing to hold that volume?
Uh, and how will they behaveover the business cycle?
Will that, will there be a morevolatile holder, a less volatile holder?
(13:21):
You know, the fed wasnot an economic buyer.
They were a policy buyer.
So they weren't buyingfor risk return metrics.
They were buying to impact thefundamentals in that, in that business.
That's not why private investors invest.
They're looking at, uh,yield risk adjusted returns.
(13:42):
So that's a kind of a big unknown.
And I think that part of what yousee in those spreads is the search
for what's going to happen next.
Dale Vermillion (13:52):
And that concern the Fed has about the mortgage backed
securities is it just because they'reconcerned about the stability of those
funds is really what it comes down to?
Doug Duncan (14:01):
Well, I don't, I don't think they're worried about,
um, the value of the MBS or thehealth of the MBS themselves.
In fact, that's one of the thingsthat's different in this current
banking, uh, issue that we've hadthat's different from 07 to 09.
You know, seven Oh nine, itwas really an asset quality.
Yeah, that's exactly right.
Case today, treasuries are solid.
(14:22):
The MBS are solid.
They just don't want to be interveningin the market, uh, by being a buyer in
a specific sector, they've taken somecriticism for, for that in the past.
And that's why they traditionallyhold only treasuries.
Uh, so they would like to get back outof that space and, and, uh, have the
market perform more on fundamentals.
Dale Vermillion (14:44):
So you said a couple of things there that
I thought were really key.
Um, first off, you said just aminute ago that this is not two 7,
008, uh, 2007, eight, nine, and 10.
And a lot of people ask that.
I hear that all the time from people.
Are we going back to2007, eight, nine, 10?
My answer is always like, no,that's a totally different problem.
Totally different issue.
It was, it was more asset basedcredit, quality based those kinds of
(15:07):
things where this is just economic.
It's just based on rates and what'shappening, which is more cyclical.
Okay.
And it's going to change.
And I loved when you said earlier,Doug, and I think this is a good
reminder for the industry that, youknow, we're so quick to say, Oh my gosh,
rates went up so much, that's so bad.
And we forget it actually landedmuch better than it could have.
(15:27):
And it probably should have, we actuallydid way better through that process.
We're still seeing.
Pretty good production out there.
I know for my clients, many ofthem are doing very, very well.
I've got clients who actually are doingbetter in 2023 than they did in 2022.
And that was better than 2021, believeit or not, when it was a record
year, but they understand the market.
(15:48):
They, they understand what's happeningaround them and they're making changes
to separate themselves in that market.
So I love the fact that you talked aboutthat to remind us, we should be grateful.
We're in the industry that we're inand it's responded as well as it has.
And this is just another phase we'regoing through that we've got to deal with.
Let's talk about housing for a minute.
(16:08):
Tell me what you see as a long termprognosis for housing down the road.
Um, I know you just said thatyou're thinking, you know, at one
point it was a 10 percent drop.
Now you're cutting that ahalf to a 5 percent drop.
What do you see in the next, let'sjust talk the next three years.
What do you think real estate'sgoing to do from a value standpoint?
What do you thinkinventory is going to do?
That's the biggest concern andheartburn for lenders today.
(16:31):
Cause we.
We do, we have the biggestdemand we've ever seen.
We've got population numberson our side for Gen Y, Gen Z.
When you look at that was 168 millionpeople in those two generations.
That's a huge population thatultimately will own home someday.
Um, tell us a little bit moreabout that, if you would.
Doug Duncan (16:49):
Yeah, the, um, uh, from the very big picture, people
ask me why I've stayed in thereal estate space all my career.
Dale Vermillion (16:58):
I can't wait to hear this.
Doug Duncan (17:01):
It's a real simple, you'll find I'm actually a pretty simple guy.
Um, the, it is true that every humanbeing on the planet puts their head
down every night on a piece of realestate somewhere, it's part of the human
condition, so, you know, depending on.
(17:22):
Population, wealth, income, risks.
There's a whole bunch of waysthat can play out, but it will
always be part of this story.
And so it is to me endlesslyinteresting from that perspective.
Dale Vermillion (17:35):
Yep.
Doug Duncan (17:35):
The, the, um, uh, there's a variety of things that are going on.
You, you, um, uh, mentioned thedemographic side, the demand drivers.
So, coming out of the 07 09 time period,there was this theory that, uh, the
millennials had learned from their parentsexperience in the foreclosures, and they
(17:59):
were going to want to rent 300 squarefoot apartments with, uh, amenities.
And so, there were all these stories ran.
So, we started a survey of 1, 000households a month in June of 2010,
and we continue it to this day.
It's been very useful.
In that first month survey, June of2010, 92 percent of millennials said
(18:21):
they eventually want to own a home.
They were like, so how do youexplain the news stories who are
not talking to the millennials?
And so what the, what the reporterswere seeing was that the jobs, which,
uh, which the millennials were takingwhen they were coming out of school
and whatever, Led them downtownbecause this was the most urban centric
(18:48):
economic expansion since World War II.
So if you were going to have a job,you had to have an apartment downtown
because that's where the jobs were.
So it wasn't that you wanted theapartment, you wanted the job.
That's right.
So what they were, what theywere telling us was when our
economic position improves.
(19:08):
We eventually intend to buy ahouse, but we're going to this
job has to grow an income.
We have to get our credit in shape.
We'll probably get married.
Uh, and and that's that point.
We'll look into moving to a placewhere we can afford and buy a house.
So, no generation is any differentfrom the other as far as we can tell.
(19:29):
In terms of the demographics.
So then it's a question of how manypeople there are, how many households
they form and the millennials arethe biggest generation we've ever
had, even bigger than the boomers.
So, but then the boomers play a roletoo, because they have something on the
order of an 80 percent home ownershiprate and they're going to age in place.
(19:50):
And so that, those propertiesdon't come, uh, come back into
the market They, the boomers startto pass on in a couple of years.
The leading edge of the boomers turns 80.
So that life expectancyis, uh, shortly after that.
So over time, you'll see some of thatcome back, but of course then the gen
(20:13):
Z's are coming in, however, that'ssupplemented by immigration that will
continue the demand curve on that side.
So a lot of it is left, uh, in the, inthe, uh, In the field of the builders.
And um, when we said in 2014 we offof our survey combined with some
(20:37):
demographics, we said actually the problemgoing forward is going to be supply.
And people thought we were crazy 'causewe'd just come off this, uh, this
crazy times foreclosure and stuff.
And they're like, youguys, you're kidding.
You really think that, wellnow everybody's in that camp.
But what had happened was wewent from building about 1.
(21:00):
6 million single family detachedhouses at the peak in 07 to 400, 000.
In other words, we destroyed threefourths of the supply chain, and then we
stayed there for three and a half yearsbefore construction started to pick up.
All that three and a half years,the millennials were aging, and they
were moving closer and closer towardThe point when they would start,
(21:24):
uh, driving the demand curve andthat happened in probably late 2015.
Uh, and since then they've reallybeen the driver, uh, as they've moved
toward peak home buying age, whichis still a couple of years from now.
So, but the, the builders byand large, historically had
built to the move up buyer.
(21:46):
And so when you went into a buildershowcase, they were showing you options.
Like, you know, you could have granitecountertops or finished basements or, you
know, other attributes that representedthe equity you were taking from your first
home and making your next home nicer.
Well, entry level people needbedrooms, bathrooms and a garage
(22:09):
and not much more than that becauseaffordability is their biggest challenge.
Dale Vermillion (22:13):
Right.
Doug Duncan (22:13):
That's not really what the builders were targeted toward.
And so it took thebuilders a little while.
To learn how to position themselvesto meet entry level demand as opposed
to move up demand, which there wasstill move up demand, but there,
there was more entry level demandthat they had faced in the past.
So they're getting better atthat, but it's still today with
(22:36):
the boomers, aging in place.
And when the, with the Gen X folks lockedin with those 3 percent mortgages, It's on
the back of the builders to build supply.
Uh, and so builds are doing very well.
Um, uh, because demand, uh, uh, as yousaid, demand is strong, even though
(22:56):
mortgage rates have risen to over 6%.
A little history here.
If you go back to World War IIand you track the 30 or fixed rate
mortgage rate, About 6% is theaverage over that whole time period.
So it's not, it's only a shockbecause we went from 3% Right, which
no one should have ever expected.
That's right.
to back to normal.
(23:17):
But it felt like a, a real problembecause the shift was so big, but it
just got us back to the historical norm.
Dale Vermillion (23:24):
Yep.
You sound like you're,you sound like me now.
I keep talking to everybody and sayingthese, this is not an abnormal rate.
This is the normal mortgage industry.
It just feels like it because we're soclose to those low rates that we had.
So let me ask
Doug Duncan (23:37):
you,
Dale Vermillion (23:39):
yeah,
Doug Duncan (23:40):
refinance down to eight and then refinance down to six.
Dale Vermillion (23:43):
Well, I started in 1983 and rates were 17 and a half on a mortgage
when I was selling them in that day.
So, you know, These ratesdon't seem too bad to me.
Um, yeah,
Doug Duncan (23:54):
I'm going to pretend like I read that in the history book.
And I wasn't there.
Dale Vermillion (23:59):
I love it.
Um, so, you know, you hear talk aboutthe quote unquote, silver tsunami, uh,
this thought that, you know, the babyboomers will die off at a point where
we'll have a lot of real estate available.
Is there any, is there any truth to that?
If so, what, what is that going to happen?
When do you see that andenvision that happening?
Doug Duncan (24:20):
Well, actually, I have a 2 or 3 longer term research projects
that I've got staff working on.
One of them is that question.
Dale Vermillion (24:29):
Okay,
Doug Duncan (24:30):
but so what did what did the boomers do with the
equity in their home in late life?
Because, as I mentioned, they haveabout 80 percent of ownership rate
and not all of them have the savings.
To maintain the lifestyle that they want,or to support later life difficulties.
And so there is a question of how does thehousing, uh, equity play out into that.
(24:56):
Um, I don't have a solidanswer for that yet.
People, a lot of people, uh, we'lltalk about reverse mortgages.
We've done some, uh, focus groupswith, uh, older households.
They're like, you know what,we've paid the house off.
This is, we're going tostay here in this house.
We don't like reverse mortgages becausethey're, they're not efficient and they're
(25:19):
not really part of our financial plan.
So, you know, conditions changeand force people to make.
To make changes.
Um, so we'll see how that plays out.
And there, that number ofpeople is growing very rapidly.
I've seen, I haven't done the calculationmyself, but I've seen estimates of 10, 000
(25:40):
people a day, um, passing the age of 65.
Uh, that's a lot of people.
Uh, and when you think about 80 percentownership rate in that population,
you get, that's a lot of houses.
As well.
So I think that's a kind of an openquestion, uh, which we're trying to see.
Is there anything we should be doing asa company and thinking about enabling
(26:03):
them to, to continue in that space?
Um, or thinking about transitions,some way to help them liquefy equity.
If that's a, an issue that they would liketo pursue, we're just trying to understand
what they want, what they will need.
mismatch between there and isthere something we should be
thinking about doing to help?
Dale Vermillion (26:23):
Yeah, well, that's really interesting because, you know,
reverse mortgages have, have really hada pretty difficult time for the last 10,
20 years, um, in creating any traction.
Uh, I think part of that's justbecause people don't understand them.
I think part of that is because, uh,they've seen some cases where they
felt like, you know, they, they maybepeople lost out because of that.
(26:44):
But a lot of that is just becausethe demographic wasn't there.
So, For lenders today, that's probably agood additional product to have in your
portfolio going forward, because therewill be a time I think when that's going
to become very viable, especially ifwe see some changes in the way reverse
mortgages are set up and they make them alittle easier for consumers and a little
(27:05):
bit more protection in those things.
I think it'd be really great.
Um, talk about, talk about the.
The new construction, because we'restarting to see more building again.
I know that, you know, as I travel around,I see it more and more than I did for a
while, there was nothing happening andyou know, 2008, nine, 10, 11, 12, 15.
We're starting to see it again.
How fast do you think we can expect?
(27:26):
To see housing start to catch up throughnew construction and through building,
especially because like you talkedabout, you know, the biggest challenge
we've got is getting affordable housingfor these, uh, gen Y, gen Z that we're
dealing with right now that they justcan't afford the 450, 500, 550, 000
homes that are so common out there.
Doug Duncan (27:47):
Yeah.
Um, so we are, uh, we are seeing a strong.
Stronger than expected, let me say thatstronger than expected construction.
Good, simply because there is ashortage relative to demographics.
(28:08):
It depends on who's estimates andwhat kind of properties are including
somewhere between 2 and 4M units.
Of single family homes and apartments.
Are needed to catch up to the demographicdemand and that takes a while.
So, uh, uh, you know, there's,there's ongoing growth.
(28:29):
That's the catch up partplus the ongoing growth.
So thinking that this is going tohappen in the next two or three
years is probably really optimistic.
There's, but, but it doesmean there will be strength,
particularly on the purchase side.
And that's, that is one thingthat those companies who
looked ahead beyond the refly.
(28:50):
The business in the pandemic and said,well, there's stability and strength
in the purchase side of business.
So I'm going to make sure I'min the business to help people
buy homes, to live in them, notrefinance their existing home.
Those firms are doing fine.
Uh, that, that's a solid business andwill be for the foreseeable future.
(29:10):
Um, so the builder is going todo what they can to get there.
One of the things that is happeningIn some locations is a recognition
by local jurisdictions thatthey need to ease development
concerns and zoning situations.
To allow the constructionof affordable housing.
Good.
(29:31):
There's not it's it'sa local issue, right?
It's not something you can pass alaw in Congress and make it happen.
It's got to be jurisdictionby jurisdiction.
So.
You're seeing signs of that recognition.
I wouldn't say it's a bigthing yet, but it is growing.
You've seen things like the.
Accessory dwelling units discussions and.
(29:54):
Uh, so, uh, some infill, uh, permissions,uh, being offered, some things like
that, that needs to continue, uh,in, in order to, to, uh, improve
supply, especially affordable supply.
Uh, my, um, sense of where the financingpiece is going to be, particularly
(30:17):
interest rates, I don't think you'llsee a whole lot of change in credit
criteria from where we are today.
They're pretty stable.
The loans that are outthere are pretty good loans.
A little bit of an uptick in FHA.
Part of that is that when rateswere at 3%, people were refinancing.
(30:38):
The higher quality borrowers thatwere already in the FHA portfolio were
refinancing out, getting rid of theMI and getting a conventional loan.
Which on average raised the delinquencyrate in the FHA portfolio as
those better credits financed out.
But that's kind of the only thing thatyou're seeing on the quality side.
The, uh, a question is, um,uh, the condition on the Fed
(31:06):
getting control of inflation.
So if we assume the Fed getsinflation back to their target,
then what would you think rateswould be in a normal housing cycle?
What I'm telling people is if theCongressional Budget Office, which
makes the official estimate of potentialGDP is correct, they're thinking right
now, uh, real growth of around one andthree quarters percent might be normal.
(31:32):
Then that 6 percent mortgagemight be at the high end.
And so, uh, when, uh, the, when, um,The 6 percent was the average 30 year
fixed rate for a very long time period.
The U.
S.
was growing at about 3 percent annually.
And so, or two and three quarters.
So if you drop that a full percentagepoint, you would think that the
(31:54):
run rate of real interest rateswould be at a lower pace as well.
So I'm, what I'm saying is if thatlogic holds, then you might expect
over the, the, the business cycle.
Mortgage rates to run from fourand a half to 6 percent with maybe
a central target of five and aquarter or something like that.
(32:16):
I don't, I don't know.
That's not solid science.
None of us know
Dale Vermillion (32:21):
that's right.
Doug Duncan (32:23):
But I think that's a logical, you can make a logical construct that will
get you to that, which is pretty good.
Dale Vermillion (32:29):
And that's within what timeframe?
Doug Duncan (32:32):
I would say over the typical expansion recession is maybe
6 years or something like that.
So there'll be a little bit of a refiopportunity if, if the deployment
of technology does ultimatelyimprove efficiency for lenders.
That, uh, the, uh, and in the market thatthe, uh, the margin by which borrowers
(32:57):
need to see rates falls, maybe goes backto something like 50 or 75 basis points.
There'll be some minor refinancewaves, uh, in opportunities in there,
but really if you're in the mortgagelending business, being in the business
to lend to people to buy a house,that's the sustainable long run.
Dale Vermillion (33:18):
You know, one more question I want to
ask you about the builders.
How much is the supply chain issues stilla factor in that growth that we're seeing?
And the other thing is just the workforcechallenges that are out there today.
You know, it seems like everybody talksabout it that nobody wants to work.
You know, we know that that's nottrue, that nobody wants to work.
But we are seeing an awful lot ofchallenges in The workplace with
(33:40):
people being able to hire employeesand maintain them and keep them.
I know the construction businessreally struggles with that.
How much of a factor those two play inthis growth and the speed of the growth?
Doug Duncan (33:52):
Um, well, if you watch the surveys of builders, skilled
labor is always sort of the topof the things that they need.
Uh, that goes back to the crisiswhere we went from building 1.
6 million units to 400, 000.
That meant three quarters ofthat labor that was in there was
(34:13):
unnecessary at that 400, 000.
And it was there for threeyears, three and a half years.
So that labor went somewhereelse and found a home.
So it takes time to build skills thatgeneral labor is not so hard to find, but
skilled labor is what, uh, what they'vebeen saying consistently for years.
(34:38):
Um, so that, that's a challenge and willcontinue to be, uh, to be a challenge.
And I know there's some places that areturning to building some, uh, skilled,
uh, trades, uh, some of the tradesare, are running schools and training
programs to try to help, uh, bringsome of that labor in other materials.
(35:00):
Um, At the outset of the pandemic,they shot through the roof, um,
Lumber has come back, it's stillsensitive to pickups, sudden pickups
in demand, and so it's probably notas stable as it was for a long period.
There's volatility.
There are still some components, whichare maybe more complex to produce.
(35:24):
That were the, they're still, uh,higher cost than what they were
prior to the pandemic, but the, thesupply is just for the pandemic had.
Uh, emerged from a couple of things.
1 was when we lost 20Mjobs, the builders are like.
(35:44):
Who's going to buy ahouse in that environment?
And so they immediately.
Pulled back on their construction plans.
And that was exacerbated by the needfor them, if they retained the labor,
to protect it from a health perspective.
So they had to figure out how we'regoing to do this in a way, if there
is going to be demand for houses, howare we going to do it in a way that
(36:06):
we protect our labor forces health.
That took a while.
It was maybe four or five monthsbefore you started to see the
resumption of construction.
That four or five months, Themillennials were receiving, some of
them receiving paychecks, even thoughthey weren't going to work through the
paycheck, paycheck protection program.
(36:30):
So the demand side kept going and we werealready behind the curve on supply and we
got another four months behind the curve.
So those things kind of compiled.
Uh, like I say, some of the supplythings have been, uh, have been,
uh, Improved, I wouldn't say solvednecessarily, but have been improved,
(36:53):
but they're still, uh, costs are stillaccelerated beyond what they were.
And you can see that in the margins,the public builders, they've been
doing very well in this time periodfrom a profitability perspective
because demand has been very strong.
Um, even though affordability wasconstrained, those, uh, The, uh,
(37:16):
financially stronger millennial householdswere absolutely making the move.
And one of the things that, youknow, if interest rates six and a
half percent today, some of themare, you hear this phrase, uh,
date the rate and marry the house.
(37:36):
I didn't see a cartoon the other day thatshowed a realtor You can see the door was
open and there was some patches on thewalls and there's a couple standing there.
And she says, well, thisis a real fixer upper.
How's your marriage?
I love the builders.
You can look at the public builders,earnings reports, and you can
(37:59):
see they've been doing very well.
Demand is very strong, eventhough we've seen that range
Dale Vermillion (38:04):
shot.
Yeah.
Well, you know, I'm wearing a back tothe future t shirt because that's been
our theme this year, Doug, uh, mortgagechampions with our clients all year
long is to succeed in this market.
You got to go back to thebasics to succeed in the future.
We're, we're back to a traditionalmarket, six to 7 percent rates.
We're, we're fighting that battleof, you know, the consumer mindset
(38:24):
is I'm still looking for threeand trying to convince them.
That's not coming back anytime soon.
So here's the deal.
You got, you got to determine what canyou afford in this kind of environment
today, because it is the new norm.
There's no question about it.
I think the last year and a half hasbeen difficult for everybody because
consumers and lenders alike, I thinkwe're both sitting, holding their
(38:45):
breath saying, okay, is this goingto change and go back to what it was?
And, you know, guys like you and I weresaying, Nope, it's not, it's headed
north and it's going to stay northfor a while because we, we needed a
correction for all intents and purposes.
Didn't really want to seeone quite this dramatic.
Uh, but nonetheless, this isa more normal marketplace.
(39:07):
So, you know, it's, it'salways amazed me, Doug.
One of the things that I, that I love themost about you is that you're an economist
who knows, you know, So many things aboutso many parts of the economy, yet you
understand the mortgage side and whatlenders are dealing with and how they work
because you're so involved and you speakat so many conferences in the industry.
(39:29):
So if I could ask you this last question,um, from your perspective, first off,
what do you think lenders Need toknow the most today about the market.
And then what would be yourrecommendations on what they can do?
Lenders, loan officers, peoplein the business to just do
(39:49):
well within this marketplace.
What are some of the blind spotsthat you can help them uncover?
Doug Duncan (39:56):
Um, well, I think that they, they need to be realistic to borrowers
about where the numbers are going to be.
Um, I think.
Even if it's tough news, you're better offbeing seen as an honest player, telling
them the truth, what they're getting to.
(40:17):
Uh, people ask me on the consumer sideis now a good time to buy a house.
And my first statement is if youhave a family budget and I'm, that's
actually what I'm trying to get atis you should have a family budget.
And then you take thatinformation from that, then you're
sitting across from a lender.
Who knows you're educated on yourown financial characteristics.
(40:39):
And there's not, there's notuncertainty about what you're
going to be able to call it.
Great
Dale Vermillion (40:43):
advice.
So,
Doug Duncan (40:44):
so you haven't just for both the lender it's a much better
situation, uh, to, to get there.
So there's that, uh, if you're, um,Investing in technology, I would spend
a little time thinking about whetherthere are implications for your business.
From the fact that the reason SiliconValley bank was taken into bankruptcy
(41:11):
on a Thursday in the middle of theday was because 42 billion of deposits
flowed out of that bank in six hours.
Traditionally, the FDIC closes,the bank closes on Friday.
It's taken over over the weekend.
It's restructured and Monday it opens.
They went on a Thursday afternoonbecause of that massive outflow
(41:35):
that was enabled by technology.
So I don't, there's not a directapplication to mortgage companies,
but you need to think about what'sthe role of technology, both
from the consumer's perspective.
And from your perspective, in termsof economic efficiency, and are there
things that you might not have consideredin your operations, where the, that
(41:59):
speed issue and mortgage banks hasalways been a speed issue, right?
It's a closing.
It's always been, there were a couple ofpeople that left Fannie Mae a couple of
years ago, went to a mortgage company.
They thought they sort of knew everything,uh, uh, that they were going to need.
And I said, Because I'd worked atNBA, which was a great experience.
I loved that.
(42:20):
Still do.
Uh, I learned so much.
I told him, I said, you haven't heardthis at Fannie, but it's a speed business.
Two years later, I saw them at an eventand they were like, it's a speed business.
So, so I would give a littlethought, a little thought to that.
(42:41):
Uh, and then I, as always.
I'm making loans to people who arebuying houses to live in them and doing
in such a way that when such time as anopportunity comes for them to improve
their loan or buy another house, you're inposition because you're a trusted party.
I think there's theirtrust is always valuable.
(43:04):
So whatever you can do to build trust.
You
Dale Vermillion (43:07):
know, you just said three of my favorite things there.
You talked about budgets.
I have never been a fan since it startedover two decades ago of using DTIs as
a calculation for approving a borrower.
We used to do a budget on aborrower back in the eighties
when I started, and you literallyweren't making a loan to somebody
unless they truly could afford it.
We didn't use a calculationof gross income.
(43:29):
We went to net income and reallylooked at what they're doing.
And one of the things I adviselenders all the time is.
Have a good budgeting tool thatyou can have your customers use.
So you separate yourself from yourcompetition and you give them something
where they can go into that homefeeling good about what they're doing.
Um, you know, I do, I do, I do radioprograms all over the country and
that's the first thing I say every timepeople say, well, what should I do?
(43:50):
When I get a mortgage first, doyour budget before you do anything.
Don't go in closed eyed to that.
And I loved when you talked about thetechnology piece, because the mistake
that I keep seeing in the industry withtechnology is we don't use it for what
it's intended for, which is, uh, creatingefficiency in your process and having
a good process of understanding, youknow, following your customer through
(44:14):
the process, what we do instead is wetry to use this as a relationship tool.
We try to use it as the waythat we have people apply.
And because of that, you don't havetrust and loyalty because all you're
doing is you're doing everythingthrough a technological mindset.
Here, let me send you a link,fill out an application.
We'll give you a quote.
Okay.
Well, your quote can be beat by anybody.
(44:36):
We already know that.
And if you don't, if that borrower doesn'treally know who they're working with,
trust them and have loyalty to them,there's no reason for them to go with any
higher rate than the lowest out there.
At that point, the only way youcan really do well is by using that
technology alongside relationshipand, and do both together.
(44:57):
So I love those closing comments.
Um, so let me ask you the,the, the last question.
I saw my, guests and you and Italked about this a couple weeks ago.
I love to hear about mentors andwho's been mentors in your life.
You mentioned one earlier, um,from the MBA that you had, um,
Louis Knight, I believe you saidwas one of your, uh, mentors.
(45:18):
Uh, but I know you'vehad several in your life.
Tell me about those and how muchyou think mentors matter, uh,
in the business world to people.
Doug Duncan (45:28):
Um, When I was appointed, uh, chief economist at
MBA, I got a call from Felix Beck.
Uh, this will be a,I'll butcher his voice.
Your forecast is all wrong.
I'm like, Oh my gosh, thisis one of the Godfathers.
(45:49):
Well, turns out, I don't knowwhy he chose, but he chose.
To, to do that and did it consistentlyfor a long period of time to help me
understand how I can help lenders, uh,understand how a forecast should play out
in their, their planning for the company.
(46:10):
So Felix, uh, he, you know, goodLord, he, he's was involved in a
hundred things, but he took the timefor this rookie forecaster to, to
lean over and tell me, look, here's.
Here's some things to learn.
Uh, and one of the great privileges ofmy life when he retired from the chase
board, he was, uh, uh, offered to, uh,they, they asked him to bring a guest
(46:36):
and he invited me to come as his guest,one of the great honors of my career.
Um, Andy Woodward, uh, is another one.
Uh, And the MBA was goingthrough some turmoil.
There was some frustrations.
He received that.
He said, you know, I need you to comedown to South Carolina to, uh, will end
(46:59):
in my place, spend a weekend with me.
I want to talk to you about how, how thewhole industry works over the long run.
See if I can help you get a littleperspective on today's problem versus.
Uh, things that have happened before.
I, I don't know why he chose to investin me, uh, but another great privilege,
another person of, of immense respect.
(47:21):
Um, so it, it does matter.
Uh, it takes two things.
One is you have to be open to it asa person to someone mentoring you.
And the second is if you are aperson of experience, you also
have to be open to finding someonethat has potential that can be.
Develop and offer to them theopportunity of your experience, uh,
(47:46):
and with no expectations of anything.
I've had a couple of chances to passthat on to other people and it's really
rewarding to see that happen, uh, uh,in, in someone's life that, that, that
there's another level that they get to,uh, It's not, it's rarely financial in
(48:09):
nature, at least that's my experience.
It is maybe different for someother people, but it's satisfaction.
It's the, the pleasure of, uh,the relationship, but also the
benefits of that relationshipand your ability to contribute to
other things that you're doing.
So I'm, I'm a believer in it.
I don't know that it, some peopletry to structure it in my experience.
(48:31):
The structure is kind of emerged.
No, that's right.
Uh, whatever makes sense emerged.
Uh, so I don't, try not to overthinkit, but, um, we don't, uh, we have a,
a development process in my, that's notspecifically mentoring in my group, uh,
but we have a development process of fourpeople across the course of their career,
(48:56):
uh, which we focus on specifically.
Um.
To help them go to the next step andsometimes the next step for them is
outside the company, not because wedon't want them, but as you know,
every company is kind of a pyramid andthere's only so far some people can
go within that pyramid, but we wantthem to go out as an advocate for us.
(49:19):
Having grown in the timethat they were with us.
Uh, and that makes it easierfor us to recruit you can
go there and work for free.
Five or six years, you reallymake progress on your career and
then move on to something else.
And then they tell someoneelse, I went there first.
That's a good thing to work with.
Yeah, it becomes a recruiting tool.
Dale Vermillion (49:39):
Great message, not only for individuals to find a wise mentor and
be open to them, but for lenders, that'sa great message to help people understand,
help lenders understand out there.
If you build a mentorship programwithin your organization, if
you build a program where peoplecan move up through the ranks.
You're going to really havegreat employees who are very
(49:59):
loyal to your company and willstay around for a long time.
I've seen that my whole career.
I mean, I've, I've worked with over 700lenders in my career and the ones that
stand out in my mind are the ones whoreally took that to heart and really
built a culture around that wheretheir, their whole focus was personal
growth and professional growth fortheir people and all that they did.
So I appreciate you saying that.
(50:20):
Well, Doug, this has been so much funand it's no coincidence you're wearing
a white shirt because you're justone of the good guys in the business.
I, I appreciate you so much.
I admire you.
I respect you immensely.
I'm super honored that you took the timeout of your busy schedule to spend with
me today, uh, on betting a thousand.
And I want to thank you somuch for that opportunity.
(50:41):
Oh, my gosh.
Doug Duncan (50:42):
You're widely respected within the industry.
So it's a privilege.
I
Dale Vermillion: appreciate that, my friend. (50:46):
undefined
Thanks for being with us and, uh,thanks for all the great advice.
And we'll look forward to seeing youguys on the next batting a thousand.
Thanks guys.
Batting a thousand is a productionof Mortgage Champions, a company
that's been transforming the peoplewho transform companies since 1995.
Have a suggested topic or guest?
(51:07):
Contact my team on Twitter.
That's @dalevermillion or tweet ususing the hashtag Batting 1,000.
That's #batting1000.
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