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Kim: Fannie Mae removed its explicit call for a recession in 2024 and now expects “below-trend growth.” At this point, how high is the risk for a recession?
Duncan: It was more of a marginal move from our perspective. There’s still a bunch of things that are highly correlated with recessions in the past that are still pointing in that direction.
There is an inverted yield curve, leading economic indicators have fallen for 21 months in a row, monetary aggregates are in decline and temporary work has turned down. There are seven or eight things that we watch that are still pointing that way, but the combination of all of them has not been enough to tip the market over. And with the Fed clearly making a shift in December, financial conditions eased significantly and that’s going to provide some support for them as well.
The market has gotten a little too enthusiastic in our view, so the change in our view on the Fed was only to change the number of cuts from three to four in 2024 with slow growth.
Kim: Compared to the beginning of January, more investors believe that an interest rate cut in May is more likely than a cut in March. Why do you think investors are throwing their hats in for a delayed rate cut by the Fed?
Duncan: I think that the markets were overenthusiastic, and a couple of Fed governors went on and walked it back, making statements along the lines of ‘let’s make sure we’re moving carefully.’ I think that was the primary thing.
Consumer spending numbers that came in at the end were quite strong, at least to the headline piece of that. On the flip side of that, consumer delinquencies for credit cards and auto loans are rising fairly quickly, which is a sign of stress in the consumer.
Kim: What is your expectation for the Fed’s timeline to cut benchmark rates?
Duncan: May, June, December and somewhere in the middle of there, where they may pause after the June meeting to see what the data looks like. It’s an election year, so it’s a little tricky to figure out exactly when they’ll do that.
Could they possibly move it up to March and May to get it out of the way of the election? They could, but I don’t think they’re going to be influenced that much by the election.
Kim: As mortgage rates increased, borrowers paid more points to buy them down. Do you think this will be a more permanent shift in the mortgage market even as rates stabilize?
Mark Palim: Part of what made it economical for the builders to offer rate buydowns was that the bond market was skeptical that the high rates would last long. So, the cost of buying down rates wasn’t as high as it might otherwise be from the perspective of borrowers and the builders subsidizing it with a buydown. I think it depends on the conditions and what the expectations are for rates.
Duncan: The 2% buydown saves you X amount of dollars monthly for as long as the market rates reach the level that you bought it down to. You have to make a judgment on how long rates will stay above that level for you to save that amount of money.
Kim: Overcapacity in the industry has resulted in lenders slimming down through layoffs and consolidations. How close are we from being done?
Duncan: I sat in on a meeting with about 30 small and midsized mortgage company CEOs where they said they made so much profit in 2020 through 2022, some of them are actually running at a loss knowingly to keep their best people.
Some are calibrating when they think volumes will pick up, how much of that pickup would be their business and what the cost is of carrying employees for this period. It may be the case that some of the employees would be willing to take a pay cut during that time period, knowing that the alternative is they lose their job.
When I was at the Mortgage Bankers Association, we had a model that worked pretty well to forecast what the downturn would be. Lenders held on to employment for six months. That was the window in which they wanted to see, ‘Will the trend change?’ so we don’t have to do layoffs, because it’s expensive to lay people off and rehire them.
One of the things that has undoubtedly changed is the advent of technology, centered around getting to the consumer faster. It’s a speed game for independent mortgage companies. They will do loans at a loss to get them done quickly, and keep the volume flowing through the business and covering their variable costs.
So, I think that those couple of alternative strategies and the advent of more technological development has changed the degree to which you see the volatility across the cycle.
Palim: The other thing I would add — two points — is that the projections for the size of the U.S. labor force are not vigorous. Growth is going to be substantially lower than it has been historically. You see pretty low levels of layoffs in the economy and questions about labor hoarding. So, it would make sense that given how hard it was to attract talent, I can see mortgage companies being reluctant to downsize unless they really have to.
Second point is, we do have a pickup in mortgage originations if rates and the economy go where they’re supposed to go next year and the following year.
Source: housingwire.com