Ajita Atreya on Freddie Mac’s quarterly forecast

Sarah Wheeler: Welcome, everyone. This is Sarah Wheeler, editor in chief at HousingWire with the latest episode of our Housing News podcast. Our guest today is Ajita Atreya, senior economist at Freddie Mac. Previously, Ajita was a research fellow at the Wharton School and has been a consultant for the National Academy of Sciences. We’re really excited to talk today about the economics of the housing market. So, Ajita, welcome to Housing News.

Ajita Atreya: Thank you so much, Sarah. I’m excited to be here today.

Sarah Wheeler: We’re really excited, so let’s jump in. The first question we always want to ask our guests is really, how did you get started in this industry or in economics in general?

Ajita Atreya: Yeah. So it will sound like a cliché answer, Sarah, but if somebody had told me when I was young that I will be working as an economist in the housing industry, I’d have said, “No way.” Not because economist is any less or the housing industry is any less interesting but because I was a science student with biology major aspiring to work in the field of medicine. But then little did I know, as a young aspirant, that needles, and blood, and crazy working hours was not my cup of tea. And hats off to those who can do it. And they are heroes and have proved that time and again, especially during this pandemic. But it was definitely not for me.

What stuck with me though was a desire to have a doctorate in front of my name to be very honest, and that’s what I started pursuing. Going back to my college days, my bachelor’s degree was in agriculture. I took courses in horticulture, agronomics, plant genetics, soil science, animal husbandry, agricultural machinery. I even learned to make jam and jellies and learned about flower arrangements, and it was all part of the course. It was a hell of a lot of an experience, but in all those, I also took some courses of economics. It was actually during my master’s degree in agricultural economics at Oklahoma State University—that’s where I did my master’s—I became fascinated with economics and the mathematics behind it.

And later I went on to pursue my Ph.D. degree, my beloved doctorate, in applied economics from the University of Georgia. And of course, in your Ph.D., you have to choose your research topic, right? So my Ph.D. dissertation, it was on flood risk, homeowners’ flood risk perceptions, and insurance where, at a high level, I studied impact of floods on home crisis and decision making around flood insurance. Again, it was a very exciting topic and very timely at that time.

I also got an opportunity to hone my understanding of housing and its intersection with natural disasters while working at Resources for the Future, which is a non-profit which is based in D.C. And at RFF, I was involved in a project studying the impact of levies on home prices. So, you know, [inaudible 00:02:55] years in internships, my interest grew in housing. After my Ph.D., I got an opportunity to work at Wharton Risk Management and Decision Processes Center where I expanded my knowledge base around natural hazard risks in housing and decision-making. So I, kind of, built my background in housing unknowingly I would say just out of fascination but that helped me get started in this industry and I ended up at Freddie Mac.

And, Sarah, if you ask me, I really enjoy research and getting into the weeds. And at the Office of the Chief Economist, we primarily focus on economic and housing research. And I work alongside some amazing and smart people which makes my day-to-day work even more interesting because we’re always trying to push that envelope and we’re always trying to stay ahead of the curve, especially during times like the ones that we’re currently living in.

And just to add a little more, housing is a very fascinating industry to be working in if you have not noticed yet. There’s so much to look at and things keep evolving. It keeps changing. So you also keep chasing that, especially during this [inaudible 00:04:08] times of COVID, which is a crazy time but, at the same time, very exciting time. And as a team, we work really hard to put together, you know, forecasts that is timely and the research theses that are timely and topical. So, yeah, this is my long, short story of how I landed in this industry, which honestly I am loving so far.

Sarah Wheeler: I love that response. Really interesting, fascinating background there. I’m not sure how many other economists have that agricultural, biological background, but it’s so interesting. And, you know, your work that led you into this with the flood risk and levy risk is so important right now. We’re going to talk about climate change and risk later on in this discussion, but thank you for sharing that. Really interesting. And I agree with you. I think housing is fascinating and I think it changes all the time. There’s always something new to talk about and, you know, within the cycles but also within all the people that it affects.

So let’s get into the next one which is about Freddie Mac’s quarterly forecast. So Freddie Mac’s latest quarterly forecast expects continuous strength in the housing market despite some of the headwinds. So inflation has been a really hot topic over the last few weeks. Is inflation a worry as far as you’re concerned?

Ajita Atreya: So, yeah, definitely our latest forecast, it points to a continuous strength in housing market although let me just highlight that. We had home sales running at $7.6 million annual rate in the fourth quarter of 2020, $7.6 million. And in the first quarter of 2021, it was running at an annual rate of $7.2 million. So given that kind of strength in home sales earlier this year, we are forecasting $6.9 million for the whole year of 2021. And this definitely reflects some slowdown in the housing market.

But, yes, you are right. We expect housing markets to remain strong because we have $6.9 million housing units forecasted for 2022 as well. And there are a couple reasons why we are so optimistic and let me just talk about those. First, we have very favorable demographics in the U.S. today. That will support the housing market for quite some time. I’ll come to that later. And, second, mortgage rates are super low. That’s one of the biggest reasons why demand is so hot in the housing market.

Now, going back to the demographics: Millennial population. They are going to be the tailwind for the housing market. If we look at the oldest Millennials, they are turning 40 this year, and the youngest are turning 25. If you look at the largest age cohort of… Half the Millennial generation is 28 to 30. And given that the median, a first-time homebuyer, is 33, we will have a significant number of Millennials coming to prime homebuying age in a year or two, and they will be on the market for their first homes. And then we have Gen Z who will follow them. So the demographics [inaudible 00:07:10] for housing market strength, it is going to stay and it is here to stay.

Now coming to the point of mortgage rates, at Freddie Mac, we publish Primary Mortgage Market Survey results each week where we survey a variety of lenders from different regions. And the 30-year fixed-rate mortgage is now hovering near 3% for a long time. As of last week, rates were down to 2.88% which is about…when you compare it to the historic lows of 2.65%, it’s about 22 BPS higher compared to the historic lows. But we need to put these rates into perspective. If you look at where rates were pre-pandemic, these have almost always been above 4%. And in the ’80s, they were the highest. So 2.88% of rates of last week or even 3% is a very low rate environment which is very conducive for homebuying.

And what do buyers look for? They look for, you know, their monthly payments, and they are concerned about their monthly payments. And even with high home prices, if your rate is still low, then your purchasing power will remain high. Now, again, coming to the topic of inflation, yes, inflation is hitting us, the core CPI, which is a different measure of inflation, which is CPI less food and shelter, subtracting food and shelter, it grew by 4.5% in June. And safe target for the core CPI is at 2%, so it is concerning.

But if you look at the components of the CPI growth, it is not so driven by goods market and certain rapidly recovering segments. What I mean by that? For example, if you look at the pandemic-affected goods, then they are vehicles. Vehicle parts, rentals were the ones that were affected the most during this pandemic in terms of goods. And those are the major sources behind driving the inflation higher this time around. And these seem like pent-up demand coming to life now, which is pushing the inflation higher temporarily. And even in the service sector that grew by 3% in June… By the way, a commodity component or the good component of CPI grew by 8.7% in June and the service sector grew by 3%. And service sector, airlines, hotels, holding events are the ones contributing early to the inflation.

So we talk about a lot in our team also about inflation, and [inaudible 00:09:41] that inflationary pressure that we’re seeing now is transitory but definitely something that we should be watching out for because that’s going to have a major implication in the housing market, you know, especially if Fed decides to correct it. In terms of headwinds, one big for the housing market is tight supply of homes for sale. And I am not the first nor I’ll be the last person to say this because the supply issue was there pre-pandemic as well, and the pandemic just made matters worse by discouraging potential sellers from putting their homes on the market. So in terms of headwinds, I see supply as a big headwind. Inflation. It is concerning but not too much up until now.

Sarah Wheeler: Thank you for walking us through that. That’s so important, and I was really glad to, you know, hear you mention mortgage rates because obviously, that’s always top of mind for our industry. And, you know, we started out the year expecting, you know, rates to rise a little bit more than they have. As you said, they’re still really, really low around 3% or under. What are you forecasting for the rest of this year and into 2022 for rates?

Ajita Atreya: Yeah. So for rates, I mean, rates are always on top of mind for our industry because this is the major deciding factor determining your purchasing power. And buyers, if you look at buyers today, they have become more sensitive to rates than in the past. What I mean by that is, if you look at prior three episodes of [inaudible 00:11:12] cycle, in 2013 cycle, when the rates were up by 100 basis points, demand goes down by 12%. In 2017 cycle, rates were up by half of 2013 rate increase by around 50 BPS and the demand fell by half, and by demand here, I mean, demand from purchase applications.

But in the current cycle, rates are up as much as seen in 2017 cycle, which there were around 50 BPS. But the demand fell by 18%. And this would be because of the rapid run up in home prices and also, you know, homes flying off the shelf in a matter of days. And we do have an index for home price called the Freddie Mac Home Price Index, and we published that on our webpage. And we track…went back to 1975. If you look at the home prices, the home prices were up 17.3% compared to a year ago in May. And this is the highest 12-month house price growth has ever been in the history of the FMHPI, which is going back to 1975. It’s higher than the mid-2000 house price boom. It’s higher than the inflationary years of, you know, late 1970s and early 1980s. And even such a strong home price growth, rates become even more important, especially when it comes to affordability.

And now, coming back to our forecast, we have this hovering, again, around 3%, at 3.1% for the whole year of 2021. But then we have it ticking up a little bit to 3.7% in 2022. Again, below 4% for 2022 as well. As I mentioned earlier, if you go back to pre-pandemic times, rates have almost always been above 4% and so, you know, rates below… We still have this below 4% going into 2022 as well.

Sarah Wheeler: I really appreciate that. You know, let’s talk a little bit more about that supply side. So low housing inventory has been the big story for much the spring and summer as you know. Do you see some relief coming in this area and what does that mean for home price growth?

Ajita Atreya: Yeah. So lack of supply is definitely a fundamental issue in the housing market, and I talked about strong home sales. But it’s not just a number but the rate at which homes are selling, which is outstanding. The 20% of homes sold today, Sarah, they go under contract within 3 days, which is just crazy to think about. And I’m seeing that, even in my own neighborhood in the D.C. metro area where the time between coming soon and under contract, it’s just mind-boggling.

And absorption rates, which is the rate at which available homes go under contract over a period of a month, it is at almost 65% and it varies from market to market. If you go to Toledo, Ohio in the midwest, absorption rate is about 89%. If you go to south, Irving, Texas, the absorption rate is 102%. Go to the west in Tucson, Arizona, it is at 117%. And in the northeast, Buffalo, New York, absorption rate is at 71%. By the way, all these numbers are based on our recent research that you can find on our website.

If the absorption rate is greater than 20%, it means that the supplier’s inventory is expected to turn over in less than 5 months at the current sale base. So 65% means that the inventory…it is expected to turn over in less than 2 months. And that’s how tight the supply is. And to fix this, I think it will require some time, and innovation, and collaboration within the industry and outside of the industry as well. And if we, you know, drive around, we see a lot of construction happening. It is going to act as a supply.

But the current base of home building is just not enough because the U.S. has had two decades of very weak housing construction. If you compare the population growth to, you know, the housing unit built, since 2000, the U.S. has been 46 million people and only 20 million housing units. In our recent research also, we saw that we need an additional 3.8 million housing units to fill the demand gap. And in 2018, we did the same research, and our numbers suggested that we were 2.5 million short in housing supply.

Fast forward 2020, we are 3.8 million short. And for builders also, there are a lot of obstacles, especially during this pandemic. There is lack of skilled laborers. There’s an acute shortage of construction materials from lumbers to household appliances to, you know, copper wiring, which is making it extremely difficult to increase the run rate of housing production. So there may not be an immediate release in the inventory. So I think, as the industry, we should come out with new solutions to this issue.

And in terms of the home price growth, given that the inventory will remain tight for a few years to come, it is hard to see home prices falling at a rapid pace and our house price forecast in Q3 that we recently published is 12.1% for the whole year of 2021 and moderate to around 5.3% in 2022. So we are still seeing that there is going to be a home price growth in the coming years as well.

Sarah Wheeler: You know, some of those numbers you threw out, they’re just crazy incredible. I mean, the rise of home price growth, that’s 17%. The fact that that’s larger than what we’ve seen going back to the beginning of when we tracked it, the fact how fast homes are going under contract. It’s just really such a crazy market right now.

Ajita Atreya: Yes, definitely.

Sarah Wheeler: You know, another variable here is the latest variant of COVID-19 has put the virus back in the new and, you know, with that, the threat of economic disruption potentially back into place. So how does Freddie Mac judge the possible impact of COVID through the rest of this year?

Ajita Atreya: Yeah, that’s a big issue and the latest variant, Delta, it’s all over news, and that’s concerning to us as well. Earlier this week, we heard NBER announce that technically we are out of recession. And if we look at economic growth, it is back to pre-pandemic levels. If we look at consumer confidence, it is high. Looking at the financial health of households in terms of personal income and savings, it is looking good, although I must acknowledge that not everyone in the economy are doing equally good and some are in the bottom half of the [inaudible 00:18:03] recovery. And if you look at the labor market, it is still struggling with 6.8 million people still unemployed.

But at a broad level, things are looking good, and we don’t want this new variant to mess this up, right? But at the same time, there’s not much we can do except for to watch out key indicators for possible impact and just be prepared. When the pandemic started in March of 2020, our team relied a lot on high-frequency data to give the state of the economy and the housing market in real-time. We looked at, you know, open table reservations, total travel throughput using PSA data, which paints the picture of how the spending is going to look like, which is very important for the U.S. economy because 70% of the U.S. GDP comes from consumer spending. So we were tracking that. We also tracked consumer confidence, sentiment, purchase applications, and more. Basically, all data that’s available on a weekly and daily basis.

And, you know, for this time also, we’ll probably go back to that model, tracking activities real-time, but I just hope that this variant is not going to bring a lot of disruption in the market. There is still a lot of uncertainty with this new virus variant as it was with the earlier one. I just hope it’s not as bad as it was in 2020.

Sarah Wheeler: Yeah, we share that hope for sure. So, Ajita, what is the latest forecast for origination volume this year? And what is the breakout of purchase versus refi?

Ajita Atreya: So in terms of origination, let’s go back to 2020 a little bit. 2020 was a very strong year. For full-year 2020, we had $1.5 trillion in inflation-adjusted versus origination, and there were about $2.6 trillion in refinance originations totaling to $4.1 trillion in total mortgage origination. And our forecast is that the strong home sales and robust home price growth, it is going to lift home purchase mortgage origination from $1.8 trillion in 2021—and that’s our forecast for 2021—to $1.9 trillion in 2022. We expect refinance activity, however, to soften a little bit because a little higher mortgage rates, that’s going to dampen their activity and so we have refinance origination declining from $2.2 trillion in 2021—which is our forecast for 2021—to $713 billion in 2022. So, overall, we forecast that the total origination will decline from $3.9 trillion in 2021 to $2.6 trillion in 2022.

Sarah Wheeler: So over the last few years, natural disasters have brought climate change considerations to the forefront, and this is why it’s so interesting to meet your background with, you know, flood risk and things like that. When it comes to the housing market specifically, what are some climate change impacts that the industry needs to be focused on?

Ajita Atreya: Yes. Climate change considerations definitely are now in the forefront of many industries today, including that of Freddie Mac. And we understand and acknowledge that changing climate has a massive part to play when it comes to natural disasters. The hurricane season has just started. June is considered the official start of the hurricane season, so it had just started in 2021. But looking back to 2020, hurricane season was notable, not only for its record number of named storms but also for its record number of rapidly intensifying storms and record number of landfalling U.S. named storms.

And the impact of this natural disaster is significant in housing market. Of course, if you look at the direct impact of this extreme weather event is the loss of life, property damages, but there are many indirect impacts as well such as declining home prices in the wake of these hurricanes, especially in the homes that are located in the FEMA-designated 100-year floodplains, which are also called the Special Flood Hazard Area. And we have published a research note late last year where we looked at the impact of Hurricane Harvey on home prices in Harris County. And we found that after Hurricane Harvey, homes in the 100-year floodplain were sold for 3.1% less compared to a similar home that’s outside of the 100-year floodplain. And this 3.1% translates to around $10,000 when evaluated at an average price home in Harris County.

In terms of how many homes in the U.S. today are in the floodplain, if you look at the data from NYU Furman Center, nearly 7 million housing units today in the U.S. are in the Special Flood Hazard Area. In the Special Flood Hazard Area, they’re also ultimately called the 100-year floodplain. If you hear A zone, E zone, B zone, these are all 100-year floodplains where there is, like, 1% annual chance of getting flooded, which does not sound like a big probability. But if you translate it to a 30-year mortgage period, it’s 26% annual chance of getting flooded over 30 years of the mortgage period. And with this kind of price declines and an increasing number of intensifying storms and hurricanes, these extreme events have implications for housing market, causing big strength in house prices. And as an industry, I think we should be looking at current risks like this and work towards mitigating or even adopting to these risks.

In addition to the current risks, we should also be focused on future risks, I think, and with climate change, one of the most salient long-term risks in the housing market is the risk of sea levels, right, which may not be an immediate risk for many parts of the country and given the duration of mortgage is actually not 30 years. It’s 10 or even less than 10 years, makes the risk exposure limited. But remember that, in the U.S., 40% of the U.S. population live on the coast, and a lot of work is exposed to the sea level rise risk. So we need to put our attention into the current risks as well as the future risks as well. So we should refocus as an industry on these different kinds of risks.

Sarah Wheeler: Yeah, really interesting there. You know, as the backer of so many U.S. mortgage loans, including those scenarios where natural disasters have become more common and, to your point, you know, those coastal areas, how does Freddie Mac factor in the rising risk from climate change?

Ajita Atreya: You know, actually, Freddie Mac has been very good at mitigating losses from natural disasters. And we do that through several channels. And some of the ways that we implement is, first, requiring all homes in our portfolio to have homeowner insurance coverage in amounts equal to the UPV of the mortgage or 80% of the replacement cost of the property improvement, whichever is higher. So this protects both Freddie Mac and homeowners by ensuring the coverage will always be enough to cover the balance of the mortgage should the property become a total loss.

And then we have, on top of that layer, the flood insurance. For homes that are located in the 100-year floodplain or this Special Flood Hazard Area that I just mentioned about, these are designated by FEMA, we require that borrowers must have flood insurance coverage, which is actually not included in homeowner insurance, and people think that it’s included in the regular homeowner insurance but it is not. But we require home borrowers to have that flood insurance throughout the life of the loan. So that’s one of the things that we require.

And we also have a lot of geographic diversity of this mortgage portfolio, and this limits the impact of any single natural disaster event. And therefore if you look at Freddie Mac’s default and subsequent losses from past natural disasters such as Hurricane Katrina, Superstorm Sandy, and the 2017 Harvey, Irma, Maria hurricanes, those have not resulted in significant economic losses to the company.

And to better manage flood risk, Freddie Mac also reviews alternative flood models and maps in addition to FEMA maps. And these third-party sources help us determine the impact of, for example, rising sea levels and helps us identify coastal communities that face chronic inundation, which helps us evaluate our potential exposure in these cases. So there is an array of things that Freddie Mac does in order to keep ahead of the impact of the rising risk from climate change.

Sarah Wheeler: Yeah, really interesting. Thanks for walking us through that. I think we could have you back and have a whole program on the flood insurance program, right, and what that might look like going forward. But I really appreciate you sharing those insights. You know, my last question is looking ahead. I know that this is something that you do as an economist and obviously Freddie does. So looking farther ahead into the next 5 to 10 years, what are some of the homeownership trends that Freddie Mac thinks will have the most impact on housing going forward?

Ajita Atreya: So, you know, the COVID-19 pandemic, it has definitely brought many changes to the housing market, which we all are witnessing. During this time, more and more homebuyers, they started looking for homes away from city and demand larger homes because their needs also changed; obviously, work from home. And the pandemic has pushed many households to rethink their choices of residential environment. Recently, we put out a research note looking at the current housing trend. And in one of the recent researches, we looked at residential environment trends.

And what we saw is that there is a rising trend of suburbanization and movement to rural areas. If you look at the housing inventory in urban versus suburban versus rural areas, and I’m talking about data in May of 2021, urban housing inventory was down by 6%. We have tight supply and we have tight supply in urban areas still. And the inventory was down by 6% year-over-year. If you look at suburban areas, it’s plunged by 34%. And in the rural housing inventory, it’s plunged by 37% compared to a year ago, which suggests that the demand is skewed now more and more towards suburban and rural areas.

And I think it’s still early to say that this trend is here to say, although even before the pandemic hit, there was an observed shift of home purchases in the last decade from urban areas to suburban and rural towns. And the pandemic has definitely accelerated this shift. But at least for a few years to come, there will be some shuffling in the housing market in terms of what kind of housing is demanded and where it is demanded. And so that’s one of the trends that we are watching for the next 5 to 10 years.

And another key household composition trend that we’re seeing is increase in single-person household. So if you drive around diversity, you see that smaller houses are being ripped up. They are being replaced for bigger homes. But if you look at the household composition in the last 40 years, single-person household have almost doubled in the U.S. And currently 28% of all households are… Around 36 million of the households are single-person households. And in one of the research that we are getting ready to make public, we predict that there will be an additional 5 million more single-person households in the next decade. And because their need for housing is different from other household types in terms of the size of the house, in terms of affordability, the rising number means that we should make homeownership possible for this group as well. And this is one trend that we are looking at plus research around many more housing trends that we are seeing in the wake of this pandemic.

Sarah Wheeler: So interesting to see as you said which of those are going to be long-lasting 5 years out versus 10 years out, but as per usual, we’ll be looking at Freddie Mac for this information and for that data as we go forward. But, Ajita, thank you so much for being with us today.

Ajita Atreya: Oh, thank you so much for having me. I just enjoyed the talk.

Sarah Wheeler: It’s been great. Thank you so much and this wraps up another episode of Housing News.