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24 The Exchange Fannie Economist Douglas G. Duncan provides insights and context into the GSE's Economic and Strategic Research Group's revamped housing and economic forecast for 2022. According to Fannie Mae's Economic and Strategic Research (ESR) Group, elevated inflation and higher interest rates are expected to further weigh on economic growth and home sales as the year progresses. Economic pressures on the average American, with rising prices at the gas pumps and an overall rise in daily expenses, have forced the ESR Group to revise its forecast for total home sales in 2022 to just 5.82 million units, a 15.6% decline from the total recorded in 2021, and steeper than their previous forecast of a 13.5% drop. As these forces continue to deter the average homebuyer and first-time buyer, sales expectations were also reforecast downward for 2023 to a pace of 5.15 million units—down from the originally predicted total of 5.29 million units. Douglas G. Duncan, SVP and Chief Economist, Fannie Mae, spoke about the ESR Group's revised figures and the mounting obstacles that prospective homebuyers may face as 2022 continues. Duncan, as SVP and Chief Economist for the GSE, is responsible for forecasts and analyses of the overall economy and the housing and mortgage markets. He also oversees strategic research regarding the potential impact of external factors on the housing industry. Under his leadership, Fannie Mae's ESR Group won the NABE Outlook Award, presented annually for the most accurate GDP and Treasury note yield forecasts, in both 2015 and 2016—the first recipient in the award's history to capture the honor two consecutive years. Named one of Bloomberg/Business Week's "50 Most Powerful People in Real Estate," Duncan is Fannie Mae's source for information and analyses on demographics and the external business and economic environment; the implications of changes in economic activity on the company's strategy and execution; and for forecasting overall housing, economic, and mortgage market activity. Prior to joining Fannie Mae, Duncan was SVP and Chief Economist at the Mortgage Bankers Association (MBA). His experience also includes work on the Financial Institutions Project at the U.S. Department of Agriculture, and service as a LEGIS Fellow and staff member with the Committee on Banking, Finance, and Urban Affairs for Rep. Bill McCollum in the U.S. House of Representatives. Is there a recession on the horizon? For the overview, we haven't changed anything substantively over the last couple of months, although obviously interest rates have moved up, which, in and of itself, will have had some impact on activity. We still have a recession forecast for next year. It likely will be mild recession, but it could be sooner than what we have in our forecast which is predicated on the Fed's response to inflation. at is the key question: just how aggressive will the Fed have to be to achieve their inflation targets? Our view is that they will have to be aggressive, and that it [the tighter monetary policy] will cause a mild recession next year. I think they are getting increasingly concerned that the inflation expectations might come unanchored, and it's very costly to anchor them. ey have said, "We're leaving the door open for another 75-basis point increase, and we have two more 50-basis-point increases this year." is has them getting to 3% by the end of the year. We see a continued slowdown in economic activity, and it seems that particularly middle- and lower-income households are experiencing the strain of inflation in two ways. First, it's degrading their real incomes. Second, it's increasing the cost of goods from a consumption perspective and leads them to reallocate some of their consumption. Housing does not like interest rates that move up dramatically in a short period of time, and that is because incomes do not adjust as rapidly. When rates move up and incomes do not keep up, the result is affordability challenges that are expected to take a toll on housing activity. e affordability challenges impact various income groups differently. Among those in the higher income group, the savings rate is significantly higher than it is for the lower quintiles. ese consumers, in many cases, are building their dream home. ey are not as sensitive to interest rates or prices, and they're committed to homeownership. Meanwhile, people that are affordability- constrained, lower- and middle-income households, feel the strain of higher borrowing costs. If you look at data on where savings are distributed, the higher end households still have significant savings along with their income. So, demand from this pool of consumers is keeping house prices elevated even as sales slow. In the first quarter, home price gains were up 20% from year-ago levels, but we expect this to be 15% for Get to Know Industry Executives Beyond the Boardroom Douglas G. Duncan SVP and Chief Economist, Fannie Mae

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