DS News

26 ASK THE ECONOMIST HEAR DIRECTLY FROM TODAY'S LEADING MARKET EXPERTS. Dr. Ralph DeFranco has a Ph.D. in economics from UC Berkeley and 20 years' experience in housing finance and risk management, having served in various roles at Freddie Mac, JPMorgan Chase and CoreLogic. As an expert on the housing industry, DeFranco is a frequent speaker at mortgage-related conferences. DeFranco spoke to DS News a about industry issues unique to California, the threat of a recession and ongoing natural disasters. DO YOU BELIEVE A RECESSION OR ECONOMIC DOWNTURN IS ON THE HORIZON IN THE NEAR TERM? e economy is likely to slow, but still muddle through as long we don't dramatically ratchet up the trade war with China. I am not expecting a recession over the next year, but if we do go into a recession, I think it will be relatively mild for home prices because we have such a housing shortage. Sales typically decline more than home prices, and falling interest rates would simulate refi activity. I don't see any sort of national housing bubble. ings are vastly different now than they were in 2006 — in fact, they're near opposites. Back then, we had an irrational exuberance of buyers, horrible loans being made, a large numbers of cash-out refis and some thinly capitalized banks and financial institutions. Now, we have cautious buyers, extremely high loan quality, less home equity loans and banks are now sitting on record amounts of capital. Perhaps most importantly, in 2005 and 2006 they were building nearly twice as many homes as now. Today, we are underbuilt by perhaps a million or more units. Home price declines in a recession are certainly possible in the most expensive areas such as California, Denver, Colorado, or Seattle, Washington, but I don't see it getting out of control like it did last time. In fact, I think the next recession would be more like the recessions prior to the most recent one. If you go back in time, the previous four recessions, before the last one, didn't have home price declines nationally. I think the next recession will be closer to those earlier recessions where the damage to the housing sector was short-lived and limited. COULD YOU SPEAK MORE ABOUT THE ONGOING INVENTORY SHORTAGES? DO YOU SEE ANY RELIEF FROM THAT COMING? Inventory is tight coast to coast, and I don't see any relief unless interest rates shoot up or we go into a bad recession. Construction has been more than matched by new demand from population growth this cycle. At the end of last year when interest rates were spiking up towards 5% for 30-year fixed-rate mortgages, we were seeing sales really slow and inventory increase in expensive markets like California, and the housing market really took a hit. Now, the market is as strong as it can be given the limited inventory, so there would be more home sales if there were more available. Again, the exception is that there's increased inventory at the higher end, and that makes sense because that is where there has been more new construction and due to the impact of changes in the tax law. e tax law used to subsidize home ownership, so there was an incentive to buy a larger home. Now that incentive is effectively gone for most people due to higher standard deductions and new limits on deductions. ere's a shift. Parts of the country such as Illinois and Connecticut are actually seeing stagnant or even falling populations as people migrate towards lower tax areas and business-friendly regulations. We're definitely seeing several trends that are playing out, but in terms of inventory, it's generally quite low, especially for the first- time homebuyer or the entry-level market. HOW ARE MILLENNIALS IMPACTING THE HOUSING MARKET? ey're definitely the dominant homebuyer group now. ey are a major force in the housing market, and lenders and "e market is as strong as it can be given the limited inventory, so there would be more home sales if there were more available. e exception is that there is increased inventory at the higher end, and that makes sense because that is where there has been more new construction and due to the impact of changes in the tax law." Dr. Ralph DeFranco Global Chief Economist, Mortgage Services, Arch Capital Services Inc.

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