Housing remains a key component of growth for more sectors of our economy than we can almost count – and specifically including financial services. Understanding what the future might bring for the economy, and for housing and mortgage markets is essential to your credit union’s strategic plan.
Joining us at our upcoming CU Reality Check Conference (March 20-22, 2017) is Doug Duncan, Fannie Mae's senior vice president and chief economist, one of Bloomberg/BusinessWeek's 50 Most Powerful People in Real Estate. He is responsible for providing all forecasts and analyses on these topics for Fannie Mae, and also oversees corporate strategy and strategic research regarding external factors and their potential impact on the company and the housing industry.
Under his leadership, Fannie Mae’s Economic and Strategic Research Group won the NABE Outlook Award, presented annually for the most accurate GDP and Treasury note yield forecasts, in both 2015 and 2016 – the first recipient in the award's history to capture the honor two years in a row.
NJCUL President & CEO David Frankil recently visited with Doug to get a preview of his presentation.
Frankil: What are the key macro trends credit union leaders need to focus on in 2017?
Our theme for the year is really a question: will policy change extend the expansion? We are now in the third longest expansion in recorded economic history. They all eventually end, and we are terrible at forecasting those ends with precision. There are significant policy changes that are likely to occur that could extend it or truncate it, and key to us is the nature, magnitude, and sequencing of changes.
Regulatory reform, for example, would be neutral to slightly positive, and if tax reform happens, it will be positive. But if the first thing that happens is that immigration is curtailed – or we see deportations in mass quantities, with raised tariffs at the same time before reform – you may well end the expansion.
We don’t think that is likely, given that health care and tax reform are front burner, but it is still something to watch carefully.
Frankil: Let me drill down on the tax part of that answer. The mortgage tax deduction has been mentioned as possibly being at risk in the tax reform debate – why do you think tax reform isn’t a major negative?
If it goes away, it is the nature of the change that matters. If the non-itemized exemption is raised to what the Administration has proposed, it would make the deduction irrelevant to a broad swath of people – because low income households don’t itemize. High income households are just using the tax benefit if the after-tax return is better than alternative investments. Plus, with interest rates as low as they are, and with the refinancing we’ve seen, the amount of deductible interest is quite small.
On balance, impact really depends on which and how many households would be affected –probably a slight negative for upper middle income households. But if they don’t change the exemptions, and instead just wiped out the mortgage deduction, then it would have a major impact.
Frankil: Consumer confidence seems high right now – so assuming the Fed implements rate increases this year, will higher mortgage rates negatively impact home sales as they typically do?
A rise in rates will certainly curtail refinance activity, but keep in mind that so many people have already refinanced with the lower rates we’ve seen. More important is how consumers see their prospects for long-term employment and income growth. I’m an optimist in terms of housing.
We do surveys of key demographics, and one of the most encouraging findings relates to millennials, who are the most optimistic group in our survey – the 18-34 age group. We have had survey results for five years telling us that they eventually want to own a home, but were waiting for job stability and income growth. Now that they are seeing both of those, we have clear evidence that they are buying homes.
In general, as long as incomes outpace the interest rate rise, then the growth in income offsets any modest rise in rates. And more fundamentally, between WWII and now, the average mortgage rate was 6.5%, and only now is at 4.2%. That is still a very good interest rate historically, at a good 200 basis points lower than the historical average.
This is just a small sample of what Doug will be covering at CU Reality Check – and there is still time to register. The event features a wide range of expert speakers on topics of direct interest to CEOs, Senior Executives, Board Chairs, and others that are focused on setting the future course of their credit union. To learn more, go to www.CURealityCheck.com – or to register directly, click here.