5 Questions for Fannie Mae’s Doug Duncan

The GSE’s chief economist discusses the economic outlook, the multifamily sector and the impact of COVID-19.
Doug Duncan, Senior Vice President & Chief Economist, Fannie Mae. Image courtesy of Fannie Mae

As senior vice president & chief economist for Fannie Mae, Douglas G. Duncan is responsible for forecasts and analyses of the economy, as well as the housing and mortgage markets. He also supervises strategic research on the potential impact of external factors on the housing industry. 

Duncan recently shared with Multi-Housing News his insights on the state of the economy, the multifamily sector and just how bad things can get due to COVID-19.

What, in your opinion, is the current state of the economy, and where do you see it going through the end of 2020 and into 2021?

Duncan: The economy is in recovery mode, but it likely will have contracted this year by about 3 percent from the beginning of the year. We now expect third-quarter gross domestic product to grow at an annualized pace of 27.2 percent, and we have upgraded our full-year 2020 forecast to a 3.1 percent decline, up from a prior forecast of a 4.2 percent contraction.

By the end of 2021, it should be back to the size it was at the start of 2020, before the virus hit. That means that on net, there will have been an average of no growth for two years. Consequently, unemployment will be higher at the end of 2021.

Nonfarm payroll employment rose by 1.8 million in July, following a 4.8 million jump in June. While the July gain represented a large deceleration and the unemployment rate remained high at 10.2 percent, the continued pace of job recovery was strong, considering it occurred during a period of growing coronavirus cases. This suggests that the labor market will likely continue to improve, even if at a somewhat slower pace. We expect the unemployment rate will remain elevated through the end of the year but will fall below 9 percent by December.

Behavioral changes due to the coronavirus will still be a factor in 2021, and we expect a substantial segment of economic activity to recover slowly. For instance, hospitality and travel activities will likely not return to a normal level for a number of years. We therefore expect the pace of growth to decelerate meaningfully in 2021, as sectors less harmed by social-distancing measures near full recovery.

If a vaccine or some other treatment proves effective and is widely adopted, then in the near term this would likely allow some sectors of the economy to recover more quickly. We expect the household savings rate to remain high, even in the absence of additional government transfer payments, so if consumers are able and willing, they should have the ability to drive further consumption growth.

Now that the $600 in pandemic unemployment benefits has ended, just how bad do you expect the multifamily market to get in September and beyond?

Duncan: I expect some deterioration in tenant rent payments, but the degree of the decline depends on several factors. For example, how much of their extra unemployment insurance went into savings, and was their stimulus check saved or spent?


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Credit card balances are being reduced, and that may be a sign people are attempting to get total debt payments down, which might free up additional capacity to meet rents. Also, we should consider factors such as what share of primary income workers in the household have been re-employed?

How will COVID-19 and the resulting economic situation impact multifamily investment?

Duncan: Clearly, credit conditions have tightened so multifamily property sales have fallen. Risks have risen, so valuations will also reflect that change in how investors view the market. In some markets, investors likely will wait and see whether there is a change in appetite among renters for denser housing options. However, in many markets there has been—and remains—a shortage of B and C properties relative to demand. So, any negative impact may be limited over the longer term, especially if effective treatment and/or a vaccine for the virus is developed.

What about changing tenant preferences due to COVID-19? Do you think there will be a preference moving forward for homeownership over apartment living? Is this a threat to the tenant-by-choice trend?

Duncan: Time will tell. There is some evidence in some densely populated markets that there has been a move out of cities to nearby suburbs. Keep in the mind that part of this migration was underway pre-COVID-19, as Millennials have been starting families and moving to acquire more space.

We have been saying for years that the Millennial generation—same as previous generations—will likely shift to homeownership as they start families.

How is the high unemployment rate affecting landlords? Not all landlords are as well capitalized as the large institutional players. Do you expect to see some smaller landlords defaulting on their own mortgages? And how can landlords raise rents in this environment?

Duncan: In any period of economic stress, delinquencies and defaults tend to rise. Owners of any size property who are highly leveraged are at risk. Of course, if a tenant loses their income and thus cannot pay, raising their rent is not really a viable option. So, rents tend to flatten or fall. Often, what you will find is that the stated rent stays constant but there are concessions such as a number of weeks, or months, of free rent.