We had a chance to speak with Douglas G. Duncan, 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 shares his outlook on interest rates, economic growth, expectations for housing demand, and his outlook on multifamily rents and new multifamily supply.
Under his leadership, Fannie Mae’s Economic & Strategic Research (ESR) Group earned the 2022 Lawrence R. Klein Award for Blue Chip Forecast Accuracy recognizing their industry-leading work over a four-year period. In both 2015 and 2016, Duncan and the ESR Group won the NABE Outlook Award, presented annually for the most accurate GDP and Treasury note yield forecasts, becoming the first recipient in the award’s history to capture the honor two years in a row.
A word upfront from Doug: The views I’m sharing today are my own, not necessarily those of Fannie Mae or its management. They are not an indication of Fannie Mae's future business or results. My expectations are based on assumptions, and actual outcomes and their impact on Fannie Mae will depend on many factors.
Q: What is your interest rate outlook for 2023 and how does this shape your expectations for multifamily sales activity and multifamily lending?
A: We expect the U.S. 10-year Treasury rate to average 3.5% across 2023 and then to drop slightly into 2024 as the expected modest recession slows economic activity and inflation.
Q: Has the runup in interest rates slowed single-family home sales enough to meaningfully support demand for multifamily housing?
A: The sudden rise in residential mortgage rates has slowed purchase activity and slowed house price appreciation, although not as much as we expected. There is still significant pent-up demand as Millennials, many of whom have financial strength, look past today’s higher rates to bid on homes not that there are fewer bidders to compete against. That said, we expect rents to be flat to slightly higher this year.
Q: What is your outlook on the labor market and how does this shape your expectations for multifamily housing demand? If we have a strong labor market that enables household creation, does this support multifamily housing?
A: We see the unemployment rate averaging just under 4 percent in 2023 and just over 5 percent in 2024 as the modest recession slightly reduces economic growth and demand for labor. Of course, this is what keeps rents from accelerating meaningfully, especially [when] paired with the volume of rental units expected to come to market in 2023 and 2024.
Q: How do demographics – i.e. Boomer retirement and aging of the Millennial generation – shape your outlook for multifamily housing?
A: The Boomers are doing what they have always said they would do, which is age in place. The Millennials are doing what they have always said they would do, which is [to] try to buy a house. Those two forces are now at odds as the inventory of existing homes available for sale is at a very low level. Thus, the rental business remains healthy. It is slowing somewhat as the economy slows, but the demographic picture of rental demand remains healthy.
Q: What is your outlook on multifamily construction and new supply? Can this new supply be readily absorbed?
A: There are a lot of units in the pipeline. We think some of the projections of units hitting the market this year are a bit too high. Our view is that around 400,000 units will be completed this year and the market will absorb that with a bit of a slowdown in rent increases.