Doug Duncan discusses rates, inflation and the future of the housing market

Doug DuncanOne of the country’s leading economists visited the University of Denver campus in October, a guest of the Franklin L. Burns School of Real Estate and Construction Management.

Doug Duncan, senior vice president and chief economist at Fannie Mae, drew an audience of more than 100 people to the Burns Leadership Series, a regularly occurring event that invites engaging speakers to share their successes, career paths and stories while engaging with the Burns community.

Vivek Sah, director of the Burns School, led the conversation with Duncan, which centered around the country’s economic outlook. Notably, Sah asked, will a recession happen in 2024?

Following a dramatic increase in interest rates—after a decade of real interest rates (adjusted for inflation) that were close to zero—Duncan said economic shocks are inevitable, for households and businesses alike.

“That combination of things, we think, is going to lead to a significant slowdown today,” he said. “If you’re going to forecast and think about rates, you have to make a decision about how much of the rate rise is a function of stronger than expected and future expected growth versus this massive amount of public debt that we’ve brought in because we took all that private debt and transferred it to public debt with the stimulus spending that we did.”

But in the midst of it all, Sah pointed out, housing prices have remained resilient. Affordability has become more and more of an issue.

The lowest priced houses are appreciating twice as fast as the most expensive homes, Duncan said.

Increased access to technology and telehealth is allowing Baby Boomers to stay in their houses for longer, limiting supply. Gen X is staying in place too, locked in at low mortgage rates.

Affordability, Duncan said, is the housing market’s greatest challenge.

“The share of household’s income that will go to servicing housing related debt is the highest it’s been in almost four decades,” he said. “It is over 33% of their disposable income just for housing. Affordability is going to be a challenge for some time.”

Sah asked Duncan what he thought the benchmark for inflation should be. Typically, Sah said, the target rate has always been 2%. But some have recently suggested that the benchmark should be 4% or higher.

Duncan would rather see the benchmark move the other direction.

“One of the things that I think makes capitalist systems work is a sound currency and sound real values,” he said. “There’s a moral dimension to this. Two percent hits the poor the hardest because the poor are in a cash world and they have no way to hedge themselves against any inflation. So 0% inflation is the optimal from my perspective. I understand and agree that we measure inflation poorly and so there may be greater risks to deflation than there is to inflation. So if you’re going to err, make the error is on the side of very mild inflation.”

The discussion also turned to global affairs, in the face of tension in Taiwan and conflicts in Ukraine and the Middle East.

“I think you have to think about the importance of those things because they are disrupting resource allocations, supply chains, all of those kinds of things and they have the potential to get a lot worse,” Duncan said, noting that defense spending is a direct contribution to GDP. “So we worry about that and we try to understand where the pressures would come, in terms of economic activity in the U.S.”

Duncan also joined an episode of the Voices of Experience podcast to discuss his career, what it’s like to make predictions (and possibly get them wrong), and the pivotal moments in his career. Listen on the VOE podcast page!