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25 the full year. Going back all the way to World War II, the annual price gain is about 4%. So, it is still a strong house price appreciation, and we see that continuing into 2023. In 2023, home price gains will be somewhere in the 4% range, closer to an historical average. e one risk in housing that is not possible to quantify is how does a change in Fed policy impact prices? Did an easy monetary policy in recent years allow for asset value appreciation? In the stock market, the answer to that is yes. We can see that in the decline of stock prices. Target and Walmart have seen declines in stock prices, in part, because middle- and lower- income consumption has fallen off significantly. If there is asset appreciation in home prices [because of Fed policy], we do not know by how much. As the Fed tightens, we do not know how much just the change in credit costs will impact home prices, setting aside the fundamentals of supply and demand. I highlight that as a potential risk. Of the major hurdles that new homebuyers encounter, including high rates, bidding wars, lack of supply, and record high prices, which do you feel is the greatest obstacle to overcome for first-time homebuyers? Well, certainly all of those are important factors in the overall function of the market. If I were king for a day and allowed to change one thing, what would I do? I would increase supply. Based on demographics just looking at the number of households that we have and the homeownership rate, you would say there should be more people who are able to become homeowners. ere simply is not the supply of houses to match the demographic need. We are still in short supply. The ESR Group recently revised its forecast for total home sales growth in 2022 to a decline of 15.6%, compared to its previous forecast of a 13.5% decline predicted in June. However, the ESR Group upwardly revised its home price appreciation forecast to 16% year-over- year-growth in 2022 from its previously projected 10.8%. Will these projections be deeply impacted by the Fed's rate hikes? No. I do not think it was in anticipation of that [tighter monetary policy]. Mortgage rates have gone further than we expected. If they pass 6% and stay there for a full year, the risks to the sales numbers are probably on the downside. But total origination numbers for 2022 were $2.6 trillion, with a projected $2.2 trillion in 2023. Yes, in terms of mortgage dollar volumes that is right. ere is not much refinancing going on, so it is mostly purchase volume. All of the refinancing that's being done today is cash-out. What would you attribute to the slowdown in new home construction? Is it more because of inflationary pressures or is due to sliding builder confidence amid a rise in the cost of raw materials? Residential fixed investment is very responsive to monetary policy. What you have seen is that residential fixed investment has turned down before every recession that we have seen post-World War II. Even in soft landings that the Fed has engineered, it turned down. Residential fixed investment is highly correlated with monetary policy changes and recessions. We ran the experiment that's underway right now back in 2017 to 2019. e Fed started raising the Fed funds target and then started running off the portfolio. So, what happened with residential fixed investment? It fell. It is not on a big lag; it is coincidental with it. Builders are looking at that and they say, "Well, mortgage rates are going up. Will people be able to afford the mortgage to buy this house that I am going to build? If not, I'm not going to build the house, because I don't make money on houses that I build and don't sell." It is a strong relationship over time. at is what is going on in the construction space. ey are feeling a tightening. One reason we have expectations for a mild recession in place is supply is still not at the level that you would anticipate given our demographics. So, if the tightening actually slows the growth of supply, that suggests housing is well-positioned to lead the economy out of a mild recession. What major factor do you think would bring the housing market back to normalcy? Or are we experiencing what is now the "New Normal?" It is interesting that you put it that way because in our theme for the year, we said the economy and housing likely will turn toward a new normal. Our sense is we will not arrive there this year because we do believe that a cyclical recession would be required to clarify whether resources are allocated properly across the economy. And the last two recessions have not been cyclical recessions. If we are right about the recession, inflation comes back to the Fed's target and employment markets are, again, healthy. en we'll see housing lead the economy out of the recession. Two factors will be important on the other side of that expected recession from a timing perspective: one is the peak age for the millennial homebuyer is 31 years and the other is the leading edge of the baby boomers turns 80 in three years. So, there may be some convergence demographically where some boomers are forced by health or other circumstances to exit their existing homes. e supply of existing homes made available may increase at the same time as demographic demand from millennials slows. In which case, you would see prices return to more of a normal cyclical path. at might be the new normal, where those two factors kind of pass through the system. en we're back to where housing enters a normal cyclical path. One other important consideration is that, if there is a recession and it's mild, you may not see a dramatic run-up in delinquencies and foreclosures because for a broad pool of mortgages outstanding the credit quality is very good. If the recession were more serious and unemployment rates go well above our forecast of 6%, then you are talking about a different scenario, and you have to ask the question: what kind public policy will be introduced in that environment? In the last two downturns, there have been significant policy initiatives. Will there be another policy response, and how will that affect the dynamic of the housing market? at's an open question as well. Final question: what advice would you give to prospective homebuyers in this marketplace? I've given the same advice for 25 years, and I start with the same clause: If you have a household budget—and you should have one— and at today's interest rates and prices, you can afford the mortgage payment to own the home and you are living in it, then then make the move. You do not know where prices or mortgage rates are going to go tomorrow. If you are basing your decision solely on a guess about where prices or interest rates will go, then you have moved into the realm of being a speculator. Note: is interview with Duncan was conducted in late June 2022.

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