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Doug Duncan and the housing market’s supply conundrum

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The housing market is no stranger to supply constraints.

A toxic combination of wildly inflated lumber prices, a lack of new and existing homes, and the sheer number of borrowers willing to pay tens of thousands of dollars over ask on homes they’ve never seen in person, has created a pandemic-driven problem that the industry can’t quite shake.

But according to Doug Duncan, chief economist at Fannie Mae, it’s not going to be just one of these factors that brings the market back to some semblance of normalcy. It’s going to take all of them.

In an economic outlook panel at HousingWire’s Engage.marketing event on Thursday, Duncan explained that in the 2007 to 2009 downturn, the industry went from building 2.2 million units to 600,000, and stayed around that level for three years. In doing so, he noted, three-quarters of the supply chain simply wasn’t produced.

“It doesn’t just reappear,” Duncan said.

According to the economist, supply has lagged demand since around 2012 to 2013 – its not a new problem, just one that’s been inflated from the COVID-19 housing market. Real house prices began appreciating at well more than the long-term average real price appreciation. The pandemic essentially gave those price a sudden shock.

There was no comparable historic event that could explain how the economy would respond to the pandemic. It caused a pause in the supply chain, further slowing down what would inevitably be a crazed housing market.

“I grew up on a farm so I’ll give you the example people would ask my dad. They’d say, ‘Charlie, are you gonna have a good crop of corn this fall?’ And his answer was the same every year. ‘Well, that depends on if the tractor starts in March,'” Duncan said. “So it’s sort of a practical view of how the supply chain fits together to result in a house.”

According to Duncan, Fannie is expecting new home sales to be the housing market’s panacea, to an extent. The GSE’s economic group is expecting new single family home sales to settle at around 919,000 by the end of 2021 and 887,000 in 2022.

However, homeowners are still expected to experience some sticker shock. In Fannie’s National Housing Survey, the questions “Is now a good time buy a house?” saw the highest percentage of respondents since 2010 report it is a “bad time.”

“It’s also the case that a very high share of new homes that have been sold aren’t built yet,” said Duncan. “And so the builders still have to build those that meet their obligations there, which is going to tie up the resources that could actually do some expanding of new home side supply.”

While builders rush to construct these homes on the thousands of lots already purchased, existing homes may have a chance to enter the market. That is of course, if less people are expected to age in place. According to Duncan, the boomer cohort held back a good amount of supply from the housing market during the pandemic. Because this age group was at higher risk of infection, they were less likely to sell, make any big moves or open their houses for viewing.

However now, Duncan said nearly 10 boomers a day are retiring. Virtual telehealth gave them the opportunity to stay in their homes and seek treatment. A “two steps forward, one step back” approach to supply in the housing market, Duncan noted.

“I think the vaccines will help on that, as they seem to be being effective, not only against the first iteration, but also some of the variance of the disease,” said Duncan. “But as confidence rises on that side, we may also see a pickup in the listings available on the existing home site.”

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