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 Dakota State University College of Agriculture Alumni of the Year in 2018. He was also elected as a Trustee of North Dakota State University in 2022.

Doug received his Ph.D. in Agricultural Economics from Texas A&M University and his B.S. and M.S. in Agricultural Economics from North Dakota State University.

Connect with Doug

LinkedIn → linkedin.com/in/doug-duncan-4b02124

About Dale Vermillion

Dale Vermillion, a renowned sales strategist and industry icon, has trained over 1,000,000 lending professionals and worked with over 600 organizations. He’s a 3x HousingWire Vanguard, a member of the 2022 Global Mortgage 100, and 2021 Mortgage Professional America Housing Industry Icon. Dale is the author of Navigating the Mortgage Maze and the founder of Mortgage Professionals Providing Hope.

Connect with Dale

LinkedIn → linkedin.com/in/dalevermillion

Facebook → facebook.com/dalevermillionofficial

X → twitter.com/dalevermillion

Website → dalevermillion.com

Email → listen@dalevermillion.com

About Batting 1,000

Batting 1,000 with Dale Vermillion is a production of Mortgage Champions, a VCI company. Produced and edited by Jake Vermillion. Music by Envato Elements. Copyright 2024 © Vermillion Consulting, Inc., All Rights Reserved.

It is true that 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.

So now, you know, depending on population, wealth, income, risks, there's a whole

bunch of ways that can play out, but it will always be part of the story.

And so it is to me,

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 your host award winning sales strategist

and industry icon, Dale Vermilion.

All right.

Welcome to this month's batting a thousand.

Uh, I am so excited to have you guys with us this month.

And I've got an absolutely incredible guest, uh, good friend, uh, a man that

I have admired for a lot of years.

I've, I've watched him, uh, on the stage so many times over the last 15 years, uh,

speaking to the mortgage industry, um, probably longer than 15 years, actually.

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 give you a rundown on Doug's credentials.

By the way, Doug, I could spend this entire time just talking about your

credentials, but I'm going to give them the one that the ones that I've, I've

written down that they want to know.

Uh, Doug is a senior vice president and chief economist for Fannie Mae.

Uh, he was previously with the MBA before that.

He's responsible for the forecast analysis of the economy and the

housing and mortgage markets.

There is nobody that knows this industry better than Doug does.

Uh, he oversees in his position, strategic research regarding potential impact of

external factors on the housing industry, and just a couple of cool things.

Uh, Doug is a Bloomberg business week, 50 most powerful people.

People in real estate.

That's a huge accolade.

He's also in the News's 100 most influential 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.

Uh, that's, you guys are the first recipient 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 Dakota State University, PhD in agriculture

economics from Texas A& M, which means I need to call you Dr.

Duncan, and he has a BS and MS in agricultural economics

from North Dakota State.

So Doug, great to have you.

So honored to have you here.

Great to be with you.

It's.

It's a, it's a pleasure.

And, um, just to be clear, all those awards are because I have a great staff.

I try not to screw it up.

I love it.

Well, look, we want, we want to talk, uh, obviously everybody wants to know

what's happening with the marketplace and you and I chatted a little bit.

And I want to talk about, you know, the recent trends and why the rates have

not responded the way they normally do in the market and some of the things

that have been factors that have driven that and kept rates up a little bit.

The forecast for what you see and mortgage and real estate and housing and all that.

We'd love to hear that.

But you and I were having a little conversation backstage and

you'd mentioned something that I really would like to start with.

And you were talking about what the biggest problem is that chief

executives have in the mortgage world.

So share with me your thoughts on what we were talking about,

because I thought that was a great way to start this conversation.

Yeah, sure.

I was trying to understand when I was finishing my, my degree, what, what's

the value that economists can provide in the executive office and in my

first couple of years at NBA, as I was talking to some of the leaders, uh,

became clear that really their challenge is to understand trend and momentum.

Where is activity in their business and 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 are relative to that trend where you are.

And like, likewise, um, whether you are at speed with the trend or behind or

ahead, those things that seem to me are important because it, it determines where

you're gonna allocate your resources.

Uh, and there's always risk to manage.

Uh, and understanding those things will give you some insight into

the, the risks to the, to the, uh, objectives that you're trying to pursue.

Now, if you would share the, analogy that you gave me, uh, when

we talked earlier about that, uh, from back in your, your naval days, talk

about that for just a minute, because I thought that was a great analogy.

Yeah, it was, uh, it's always one, one thing that my father

taught me when I was growing up was just pay attention to everything that you do.

You may not be what you always wanted to do, but you're going to

learn something if you're paying attention, no matter where you are.

So I was in the Navy, I was an enlisted, uh, petty officer, uh,

and from time to time I would stand watch and keep the log on the bridge.

Uh, and as I watched the, the captain give orders in, uh, in directing the

ship, it was clear that whether you were in a fog bank, Or you were in

bright, clear skies, you were going to keep the ship going, no matter what.

And if you're in a fog, you don't necessarily know what's out there, but

you can't just stop the ship, right?

And that's a lot like running a company.

And maybe today there's, there's a lot of uncertainty about where

the housing sector is going to go.

You can't not go, and you have to make some decisions, uh, and, uh, actually,

there was Early in my days at mortgage bankers, uh, Leo Knight, who many

of you probably knew, uh, called me and he asked me, he said, dog, I've

got a board meeting at five o'clock.

He said, I have to make a decision on this issue.

I understand you're a new economist at MBA.

Maybe you could help me with this.

And so he told me, I don't even remember what the issue is.

He said, just call me back at three o'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,

but the data is kind of iffy and I look at it with a different set, uh, gives

a little bit different indication and the data is not perfect there either.

And he stopped and he said, Doug, the data won't be better by 5 o'clock.

He said, I'm just asking your opinion based on your professional expertise.

How would you make this decision?

That was a really important lesson.

I've always been grateful for him doing that 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.

That's really, that's, that's rich information.

Well, speaking of the fog bank, I think a lot 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, it seems like, you know, rates have just not.

Followed and tracked and responded and the bond market has the way it normally

does to inflation factors and those kind of things And I know there's a whole

lot of reasons for that between the debt ceiling problem that we had and bank

crisis But i'd love to hear I mean nobody knows these things better than you do.

I'd love to hear a little bit from you on Where we're at today why where

we're at today why rates are acting kind of Fickle and where you see things

going in the future with rates and with housing and with the market, just kind

of give us a, an overview of what you're thinking from an economist standpoint,

um, with all the data you look at,

um, sure.

Um, well, as everybody knows, the fed met yesterday and decided not

to raise the fed fund started.

Yeah, but then they muddied the water a little bit by,

uh, their summary of economic projections, suggesting they would.

Uh, at some point raise to 50 basis points, they may do it in two quarter

point increments or something.

Um, which suggests that they think that inflation is not yet under control.

Um, and we would agree from a core, uh, inflation perspective.

Well, typically when you get as big a rate shock as was in the mortgage industry

where rates doubled within a year.

You would see a lot more slowdown in housing than you saw.

There was an initial slowdown, but then the reality of the pent up demand

from the millennials who are still a couple of years away from peak first

time home buying age and the lack of supply exacerbated by two things.

One is the boomers aging in place.

And the second one is the Gen Xers who don't get any airtime.

So I'm giving them some airtime.

Now they're the ones that locked in 3 percent mortgages.

So it's not going anywhere.

So that's a huge chunk of the existing homes out there that are

really in a way taken off the market.

And so it doesn't take a lot of financial power on the demand side.

For that, uh, in this instance, stabilized prices.

First of all, I think our view, if you went back six months was over

a two year time period, we probably see a 10 percent decline in prices.

Now we've chopped that probably in half.

And we've only seen a couple of percentage points nationally, though regionally,

there are significant differences.

Right?

But so, so rates that rise in rates actually hasn't caused the problem

that, uh, that a lot of folks thought it, of course, chopped off refinances.

There's, there's just only a teeny portion of households that

it makes sense to refinance.

So those numbers have dropped way off.

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 inflation has 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's a pretty good chunk.

Like a third, uh, comes from housing that, that will flatten out.

We'll start to see some.

Reduction in the contribution of housing to inflate underlying or

core inflation, but, uh, the rest of it is still stubbornly sticky.

So, um, 1 of the issues with mortgage rates, they ran over 7

percent and things sort of stopped.

And then what you saw is people offering 2, 1 buy downs and some other issues.

That was because nobody believed that when the Fed reversed policy, any MBS backed

by 7 percent mortgages was going to be there for more than a very brief time.

So prepay risk.

Led to that 2 1 buydown situation where people could get the, uh, the rates

on an MBS back to where they thought it would last for a little while.

Yep.

The second thing that's going on in spreads, which are historically wide,

particularly the secondary spread is, uh, in addition to the prepay issue,

if there were going to be a recession, which we have a mild recession,

our forecast that raises risks, so there's a change in the risk premium.

So you have to add that in there.

I think there's also a search in the market and capital markets for

who is going to replace the Fed.

So the Fed holds 21 percent of mortgage backed securities outstanding, the

single biggest holder in the world.

Um, the combined depository institutions, banks, uh, and credit

unions hold about 29 percent as a group.

But as a single holder, the Fed is 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 policy statement that they would like to

exit, uh, have MBS exit the portfolio.

So the question is, who replaces them?

So the thrift industry is gone.

The depository institutions have, Over a very long time period, he held those

in a, in a band, which they, they never exceed a maximum share of the assets held.

And they never, they're never lower than a certain share.

They're pretty close to the top of that band at the present time.

So who steps in and replaces them?

And I think there's a significant uncertainty in the market about that.

And that widespread is in part, a search for who's going to replace that.

Interesting.

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 will they be willing to hold that volume?

Uh, and how will they behave over the business cycle?

Will that, will there be a more volatile holder, a less volatile holder?

You know, the fed was not an economic buyer.

They were a policy buyer.

So they weren't buying for risk return metrics.

They were buying to impact the fundamentals in that, in that business.

That's not why private investors invest.

They're looking at, uh, yield risk adjusted returns.

So that's a kind of a big unknown.

And I think that part of what you see in those spreads is the search

for what's going to happen next.

And that concern the Fed has about the mortgage backed

securities is it just because they're concerned about the stability of those

funds is really what it comes down to?

Well, I don't, I don't think they're worried about,

um, the value of the MBS or the health of the MBS themselves.

In fact, that's one of the things that's different in this current

banking, uh, issue that we've had that's different from 07 to 09.

You know, seven Oh nine, it was really an asset quality.

Yeah, that's exactly right.

Case today, treasuries are solid.

The MBS are solid.

They just don't want to be intervening in the market, uh, by being a buyer in

a specific sector, they've taken some criticism for, for that in the past.

And that's why they traditionally hold only treasuries.

Uh, so they would like to get back out of that space and, and, uh, have the

market perform more on fundamentals.

So you said a couple of things there that

I thought were really key.

Um, first off, you said just a minute 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 to 2007, eight, nine, 10?

My answer is always like, no, that's a totally different problem.

Totally different issue.

It was, it was more asset based credit, quality based those kinds of

things where this is just economic.

It's just based on rates and what's happening, 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, you know, we're so quick to say, Oh my gosh,

rates went up so much, that's so bad.

And we forget it actually landed much better than it could have.

And it probably should have, we actually did way better through that process.

We're still seeing.

Pretty good production out there.

I know for my clients, many of them are doing very, very well.

I've got clients who actually are doing better in 2023 than they did in 2022.

And that was better than 2021, believe it or not, when it was a record

year, but they understand the market.

They, they understand what's happening around them and they're making changes

to separate themselves in that market.

So I love the fact that you talked about that to remind us, we should be grateful.

We're in the industry that we're in and it's responded as well as it has.

And this is just another phase we're going through that we've got to deal with.

Let's talk about housing for a minute.

Tell me what you see as a long term prognosis for housing down the road.

Um, I know you just said that you're thinking, you know, at one

point it was a 10 percent drop.

Now you're cutting that a half to a 5 percent drop.

What do you see in the next, let's just talk the next three years.

What do you think real estate's going to do from a value standpoint?

What do you think inventory is going to do?

That's the biggest concern and heartburn for lenders today.

Cause we.

We do, we have the biggest demand we've ever seen.

We've got population numbers on our side for Gen Y, Gen Z.

When you look at that was 168 million people in those two generations.

That's a huge population that ultimately will own home someday.

Um, tell us a little bit more about that, if you would.

Yeah, the, um, uh, from the very big picture, people

ask me why I've stayed in the real estate space all my career.

I can't wait to hear this.

It's a real simple, you'll find I'm actually a pretty simple guy.

Um, the, it is true that 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, so, you know, depending on.

Population, wealth, income, risks.

There's a whole bunch of ways that can play out, but it will

always be part of this story.

And so it is to me endlessly interesting from that perspective.

Yep.

The, the, um, uh, there's a variety of things that are going on.

You, you, um, uh, mentioned the demographic 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 parents experience in the foreclosures, and they

were going to want to rent 300 square foot apartments with, uh, amenities.

And so, there were all these stories ran.

So, we started a survey of 1, 000 households a month in June of 2010,

and we continue it to this day.

It's been very useful.

In that first month survey, June of 2010, 92 percent of millennials said

they eventually want to own a home.

They were like, so how do you explain the news stories who are

not talking to the millennials?

And so what the, what the reporters were seeing was that the jobs, which,

uh, which the millennials were taking when they were coming out of school

and whatever, Led them downtown because this was the most urban centric

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 the apartment, you wanted the job.

That's right.

So what they were, what they were telling us was when our

economic position improves.

We eventually intend to buy a house, 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 place where we can afford and buy a house.

So, no generation is any different from the other as far as we can tell.

In terms of the demographics.

So then it's a question of how many people there are, how many households

they form and the millennials are the biggest generation we've ever

had, even bigger than the boomers.

So, but then the boomers play a role too, because they have something on the

order of an 80 percent home ownership rate and they're going to age in place.

And so that, those properties don't come, uh, come back into

the market They, the boomers start to pass on in a couple of years.

The leading edge of the boomers turns 80.

So that life expectancy is, uh, shortly after that.

So over time, you'll see some of that come back, but of course then the gen

Z's are coming in, however, that's supplemented by immigration that will

continue the demand curve on that side.

So a lot of it is left, uh, in the, in the, uh, In the field of the builders.

And um, when we said in 2014 we off of our survey combined with some

demographics, we said actually the problem going forward is going to be supply.

And people thought we were crazy 'cause we'd just come off this, uh, this

crazy times foreclosure and stuff.

And they're like, you guys, you're kidding.

You really think that, well now everybody's in that camp.

But what had happened was we went from building about 1.

6 million single family detached houses at the peak in 07 to 400, 000.

In other words, we destroyed three fourths of the supply chain, and then we

stayed there for three and a half years before construction started to pick up.

All that three and a half years, the millennials were aging, and they

were moving closer and closer toward The point when they would start,

uh, driving the demand curve and that happened in probably late 2015.

Uh, and since then they've really been the driver, uh, as they've moved

toward peak home buying age, which is still a couple of years from now.

So, but the, the builders by and large, historically had

built to the move up buyer.

And so when you went into a builder showcase, they were showing you options.

Like, you know, you could have granite countertops or finished basements or, you

know, other attributes that represented the equity you were taking from your first

home and making your next home nicer.

Well, entry level people need bedrooms, bathrooms and a garage

and not much more than that because affordability is their biggest challenge.

Right.

That's not really what the builders were targeted toward.

And so it took the builders a little while.

To learn how to position themselves to meet entry level demand as opposed

to move up demand, which there was still move up demand, but there,

there was more entry level demand that they had faced in the past.

So they're getting better at that, but it's still today with

the boomers, aging in place.

And when the, with the Gen X folks locked in 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 you said, demand is strong, even though

mortgage rates have risen to over 6%.

A little history here.

If you go back to World War II and you track the 30 or fixed rate

mortgage rate, About 6% is the average over that whole time period.

So it's not, it's only a shock because we went from 3% Right, which

no one should have ever expected.

That's right.

to back to normal.

But it felt like a, a real problem because the shift was so big, but it

just got us back to the historical norm.

Yep.

You sound like you're, you sound like me now.

I keep talking to everybody and saying these, this is not an abnormal rate.

This is the normal mortgage industry.

It just feels like it because we're so close to those low rates that we had.

So let me ask

you,

yeah,

refinance down to eight and then refinance down to six.

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 rates don't seem too bad to me.

Um, yeah,

I'm going to pretend like I read that in the history book.

And I wasn't there.

I love it.

Um, so, you know, you hear talk about the quote unquote, silver tsunami, uh,

this thought that, you know, the baby boomers 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 and envision that happening?

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.

Okay,

but so what did what did the boomers do with the

equity in their home in late life?

Because, as I mentioned, they have about 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 the housing, uh, equity play out into that.

Um, I don't have a solid answer for that yet.

People, a lot of people, uh, we'll talk about reverse mortgages.

We've done some, uh, focus groups with, uh, older households.

They're like, you know what, we've paid the house off.

This is, we're going to stay here in this house.

We don't like reverse mortgages because they're, they're not efficient and they're

not really part of our financial plan.

So, you know, conditions change and force people to make.

To make changes.

Um, so we'll see how that plays out.

And there, that number of people is growing very rapidly.

I've seen, I haven't done the calculation myself, but I've seen estimates of 10, 000

people a day, um, passing the age of 65.

Uh, that's a lot of people.

Uh, and when you think about 80 percent ownership rate in that population,

you get, that's a lot of houses.

As well.

So I think that's a kind of an open question, uh, which we're trying to see.

Is there anything we should be doing as a company and thinking about enabling

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 like to pursue, we're just trying to understand

what they want, what they will need.

mismatch between there and is there something we should be

thinking about doing to help?

Yeah, well, that's really interesting because, you know,

reverse mortgages have, have really had a pretty difficult time for the last 10,

20 years, um, in creating any traction.

Uh, I think part of that's just because 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 maybe people lost out because of that.

But a lot of that is just because the demographic wasn't there.

So, For lenders today, that's probably a good additional product to have in your

portfolio going forward, because there will be a time I think when that's going

to become very viable, especially if we see some changes in the way reverse

mortgages are set up and they make them a little easier for consumers and a little

bit more protection in those things.

I think it'd be really great.

Um, talk about, talk about the.

The new construction, because we're starting 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 and you know, 2008, nine, 10, 11, 12, 15.

We're starting to see it again.

How fast do you think we can expect?

To see housing start to catch up through new construction and through building,

especially because like you talked about, you know, the biggest challenge

we've got is getting affordable housing for these, uh, gen Y, gen Z that we're

dealing with right now that they just can't afford the 450, 500, 550, 000

homes that are so common out there.

Yeah.

Um, so we are, uh, we are seeing a strong.

Stronger than expected, let me say that stronger than expected construction.

Good, simply because there is a shortage relative to demographics.

It depends on who's estimates and what kind of properties are including

somewhere between 2 and 4M units.

Of single family homes and apartments.

Are needed to catch up to the demographic demand and that takes a while.

So, uh, uh, you know, there's, there's ongoing growth.

That's the catch up part plus the ongoing growth.

So thinking that this is going to happen in the next two or three

years is probably really optimistic.

There's, but, but it does mean there will be strength,

particularly on the purchase side.

And that's, that is one thing that those companies who

looked ahead beyond the refly.

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'm in the business to help people

buy homes, to live in them, not refinance their existing home.

Those firms are doing fine.

Uh, that, that's a solid business and will be for the foreseeable future.

Um, so the builder is going to do what they can to get there.

One of the things that is happening In some locations is a recognition

by local jurisdictions that they need to ease development

concerns and zoning situations.

To allow the construction of affordable housing.

Good.

There's not it's it's a local issue, right?

It's not something you can pass a law in Congress and make it happen.

It's got to be jurisdiction by jurisdiction.

So.

You're seeing signs of that recognition.

I wouldn't say it's a big thing yet, but it is growing.

You've seen things like the.

Accessory dwelling units discussions and.

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 financing piece is going to be, particularly

interest rates, I don't think you'll see a whole lot of change in credit

criteria from where we are today.

They're pretty stable.

The loans that are out there are pretty good loans.

A little bit of an uptick in FHA.

Part of that is that when rates were at 3%, people were refinancing.

The higher quality borrowers that were already in the FHA portfolio were

refinancing out, getting rid of the MI and getting a conventional loan.

Which on average raised the delinquency rate in the FHA portfolio as

those better credits financed out.

But that's kind of the only thing that you're seeing on the quality side.

The, uh, a question is, um, uh, the condition on the Fed

getting control of inflation.

So if we assume the Fed gets inflation back to their target,

then what would you think rates would be in a normal housing cycle?

What I'm telling people is if the Congressional Budget Office, which

makes the official estimate of potential GDP is correct, they're thinking right

now, uh, real growth of around one and three quarters percent might be normal.

Then that 6 percent mortgage might 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 percentage point, you would think that the

run rate of real interest rates would be at a lower pace as well.

So I'm, what I'm saying is if that logic holds, then you might expect

over the, the, the business cycle.

Mortgage rates to run from four and a half to 6 percent with maybe

a central target of five and a quarter or something like that.

I don't, I don't know.

That's not solid science.

None of us know

that's right.

But I think that's a logical, you can make a logical construct that will

get you to that, which is pretty good.

And that's within what timeframe?

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 refi opportunity if, if the deployment

of technology does ultimately improve efficiency for lenders.

That, uh, the, uh, and in the market that the, uh, the margin by which borrowers

need to see rates falls, maybe goes back to something like 50 or 75 basis points.

There'll be some minor refinance waves, uh, in opportunities in there,

but really if you're in the mortgage lending business, being in the business

to lend to people to buy a house, that's the sustainable long run.

You know, one more question I want to

ask you about the builders.

How much is the supply chain issues still a factor in that growth that we're seeing?

And the other thing is just the workforce challenges that are out there today.

You know, it seems like everybody talks about it that nobody wants to work.

You know, we know that that's not true, that nobody wants to work.

But we are seeing an awful lot of challenges in The workplace with

people being able to hire employees and maintain them and keep them.

I know the construction business really struggles with that.

How much of a factor those two play in this growth and the speed of the growth?

Um, well, if you watch the surveys of builders, skilled

labor is always sort of the top of the things that they need.

Uh, that goes back to the crisis where we went from building 1.

6 million units to 400, 000.

That meant three quarters of that labor that was in there was

unnecessary at that 400, 000.

And it was there for three years, three and a half years.

So that labor went somewhere else and found a home.

So it takes time to build skills that general labor is not so hard to find, but

skilled labor is what, uh, what they've been saying consistently for years.

Um, so that, that's a challenge and will continue to be, uh, to be a challenge.

And I know there's some places that are turning to building some, uh, skilled,

uh, trades, uh, some of the trades are, are running schools and training

programs to try to help, uh, bring some of that labor in other materials.

Um, At the outset of the pandemic, they shot through the roof, um,

Lumber has come back, it's still sensitive to pickups, sudden pickups

in demand, and so it's probably not as stable as it was for a long period.

There's volatility.

There are still some components, which are maybe more complex to produce.

That were the, they're still, uh, higher cost than what they were

prior to the pandemic, but the, the supply is just for the pandemic had.

Uh, emerged from a couple of things.

1 was when we lost 20M jobs, the builders are like.

Who's going to buy a house in that environment?

And so they immediately.

Pulled back on their construction plans.

And that was exacerbated by the need for them, if they retained the labor,

to protect it from a health perspective.

So they had to figure out how we're going to do this in a way, if there

is going to be demand for houses, how are we going to do it in a way that

we protect our labor forces health.

That took a while.

It was maybe four or five months before you started to see the

resumption of construction.

That four or five months, The millennials were receiving, some of

them receiving paychecks, even though they weren't going to work through the

paycheck, paycheck protection program.

So the demand side kept going and we were already 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 supply things have been, uh, have been,

uh, Improved, I wouldn't say solved necessarily, but have been improved,

but they're still, uh, costs are still accelerated beyond what they were.

And you can see that in the margins, the public builders, they've been

doing very well in this time period from a profitability perspective

because demand has been very strong.

Um, even though affordability was constrained, those, uh, The, uh,

financially stronger millennial households were absolutely making the move.

And one of the things that, you know, if interest rates six and a

half percent today, some of them are, you hear this phrase, uh,

date the rate and marry the house.

I didn't see a cartoon the other day that showed a realtor You can see the door was

open and there was some patches on the walls and there's a couple standing there.

And she says, well, this is a real fixer upper.

How's your marriage?

I love the builders.

You can look at the public builders, earnings reports, and you can

see they've been doing very well.

Demand is very strong, even though we've seen that range

shot.

Yeah.

Well, you know, I'm wearing a back to the future t shirt because that's been

our theme this year, Doug, uh, mortgage champions with our clients all year

long is to succeed in this market.

You got to go back to the basics to succeed in the future.

We're, we're back to a traditional market, six to 7 percent rates.

We're, we're fighting that battle of, you know, the consumer mindset

is I'm still looking for three and trying to convince them.

That's not coming back anytime soon.

So here's the deal.

You got, you got to determine what can you 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 has been difficult for everybody because

consumers and lenders alike, I think we're both sitting, holding their

breath saying, okay, is this going to change and go back to what it was?

And, you know, guys like you and I were saying, Nope, it's not, it's headed

north and it's going to stay north for a while because we, we needed a

correction for all intents and purposes.

Didn't really want to see one quite this dramatic.

Uh, but nonetheless, this is a more normal marketplace.

So, you know, it's, it's always amazed me, Doug.

One of the things that I, that I love the most about you is that you're an economist

who knows, you know, So many things about so many parts of the economy, yet you

understand the mortgage side and what lenders are dealing with and how they work

because you're so involved and you speak at so many conferences in the industry.

So if I could ask you this last question, um, from your perspective, first off,

what do you think lenders Need to know the most today about the market.

And then what would be your recommendations on what they can do?

Lenders, loan officers, people in the business to just do

well within this marketplace.

What are some of the blind spots that you can help them uncover?

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 off being seen as an honest player, telling

them the truth, what they're getting to.

Uh, people ask me on the consumer side is now a good time to buy a house.

And my first statement is if you have a family budget and I'm, that's

actually what I'm trying to get at is you should have a family budget.

And then you take that information from that, then you're

sitting across from a lender.

Who knows you're educated on your own financial characteristics.

And there's not, there's not uncertainty about what you're

going to be able to call it.

Great

advice.

So,

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 whether there are implications for your business.

From the fact that the reason Silicon Valley bank was taken into bankruptcy

on a Thursday in the middle of the day 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 afternoon because of that massive outflow

that was enabled by technology.

So I don't, there's not a direct application to mortgage companies,

but you need to think about what's the role of technology, both

from the consumer's perspective.

And from your perspective, in terms of economic efficiency, and are there

things that you might not have considered in your operations, where the, that

speed issue and mortgage banks has always been a speed issue, right?

It's a closing.

It's always been, there were a couple of people 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 at NBA, which was a great experience.

I loved that.

Still do.

Uh, I learned so much.

I told him, I said, you haven't heard this at Fannie, but it's a speed business.

Two years later, I saw them at an event and they were like, it's a speed business.

So, so I would give a little thought, a little thought to that.

Uh, and then I, as always.

I'm making loans to people who are buying houses to live in them and doing

in such a way that when such time as an opportunity comes for them to improve

their loan or buy another house, you're in position because you're a trusted party.

I think there's their trust is always valuable.

So whatever you can do to build trust.

You

know, you just said three of my favorite things there.

You talked about budgets.

I have never been a fan since it started over two decades ago of using DTIs as

a calculation for approving a borrower.

We used to do a budget on a borrower back in the eighties

when I started, and you literally weren't making a loan to somebody

unless they truly could afford it.

We didn't use a calculation of gross income.

We went to net income and really looked at what they're doing.

And one of the things I advise lenders all the time is.

Have a good budgeting tool that you can have your customers use.

So you separate yourself from your competition and you give them something

where they can go into that home feeling good about what they're doing.

Um, you know, I do, I do, I do radio programs all over the country and

that's the first thing I say every time people say, well, what should I do?

When I get a mortgage first, do your budget before you do anything.

Don't go in closed eyed to that.

And I loved when you talked about the technology piece, because the mistake

that I keep seeing in the industry with technology is we don't use it for what

it's intended for, which is, uh, creating efficiency in your process and having

a good process of understanding, you know, following your customer through

the process, what we do instead is we try to use this as a relationship tool.

We try to use it as the way that we have people apply.

And because of that, you don't have trust and loyalty because all you're

doing is you're doing everything through 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.

We already know that.

And if you don't, if that borrower doesn't really 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 you can really do well is by using that

technology alongside relationship and, and do both together.

So I love those closing comments.

Um, so let me ask you the, the, the last question.

I saw my, guests and you and I talked about this a couple weeks ago.

I love to hear about mentors and who's been mentors in your life.

You mentioned one earlier, um, from the MBA that you had, um,

Louis Knight, I believe you said was one of your, uh, mentors.

Uh, but I know you've had several in your life.

Tell me about those and how much you think mentors matter, uh,

in the business world to people.

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, this is one of the Godfathers.

Well, turns out, I don't know why he chose, but he chose.

To, to do that and did it consistently for 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.

So Felix, uh, he, you know, good Lord, he, he's was involved in a

hundred things, but he took the time for 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 of my life when he retired from the chase

board, he was, uh, uh, offered to, uh, they, they asked him to bring a guest

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 going through some turmoil.

There was some frustrations.

He received that.

He said, you know, I need you to come down to South Carolina to, uh, will end

in my place, spend a weekend with me.

I want to talk to you about how, how the whole industry works over the long run.

See if I can help you get a little perspective on today's problem versus.

Uh, things that have happened before.

I, I don't know why he chose to invest in me, uh, but another great privilege,

another person of, of immense respect.

Um, so it, it does matter.

Uh, it takes two things.

One is you have to be open to it as a person to someone mentoring you.

And the second is if you are a person of experience, you also

have to be open to finding someone that has potential that can be.

Develop and offer to them the opportunity of your experience, uh,

and with no expectations of anything.

I've had a couple of chances to pass that 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

nature, at least that's my experience.

It is maybe different for some other people, but it's satisfaction.

It's the, the pleasure of, uh, the relationship, but also the

benefits of that relationship and 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 people try to structure it in my experience.

The structure is kind of emerged.

No, that's right.

Uh, whatever makes sense emerged.

Uh, so I don't, try not to overthink it, but, um, we don't, uh, we have a,

a development process in my, that's not specifically mentoring in my group, uh,

but we have a development process of four people across the course of their career,

uh, which we focus on specifically.

Um.

To help them go to the next step and sometimes the next step for them is

outside the company, not because we don't want them, but as you know,

every company is kind of a pyramid and there's only so far some people can

go within that pyramid, but we want them to go out as an advocate for us.

Having grown in the time that they were with us.

Uh, and that makes it easier for us to recruit you can

go there and work for free.

Five or six years, you really make progress on your career and

then move on to something else.

And then they tell someone else, I went there first.

That's a good thing to work with.

Yeah, it becomes a recruiting tool.

Great message, not only for individuals to find a wise mentor and

be open to them, but for lenders, that's a great message to help people understand,

help lenders understand out there.

If you build a mentorship program within your organization, if

you build a program where people can move up through the ranks.

You're going to really have great employees who are very

loyal to your company and will stay around for a long time.

I've seen that my whole career.

I mean, I've, I've worked with over 700 lenders in my career and the ones that

stand out in my mind are the ones who really took that to heart and really

built a culture around that where their, their whole focus was personal

growth and professional growth for their people and all that they did.

So I appreciate you saying that.

Well, Doug, this has been so much fun and it's no coincidence you're wearing

a white shirt because you're just one 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 time out of your busy schedule to spend with

me today, uh, on betting a thousand.

And I want to thank you so much for that opportunity.

Oh, my gosh.

You're widely respected within the industry.

So it's a privilege.

I

Dale Vermillion: appreciate that, my friend.

Thanks for being with us and, uh, thanks for all the great advice.

And we'll look forward to seeing you guys on the next batting a thousand.

Thanks guys.

Batting a thousand is a production of Mortgage Champions, a company

that's been transforming the people who transform companies since 1995.

Have a suggested topic or guest?

Contact my team on Twitter.

That's @dalevermillion or tweet us using the hashtag Batting 1,000.

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