Len Kiefer Discusses the Housing and Mortgage Markets (Podcast)

Freddie Mac. For those of you who are longtime readers of mine, you know I have been somewhat fascinated by the housing market and how we put together the entire mortgage industry and and how that drives the economy and vice versa, how the economy drives housing. Sometimes the tail does wag the dog, and that was a key aspect

of what took place during the financial crisis. Our entire conversation today is really post crisis, what's taken place, how Fanny Many and Freddie Mack in particular, have changed, and what it means to uh not only the growth of the housing sector but the entire economy. So, with no further ado, my conversation with Lenn Keefer, Deputy chief Economist at Freddie Mack. My special guest today is Lenn Keefer.

He is the deputy chief economist at Freddie Mack, one of the two giant government sponsored entities that securitizes most of the mortgages here in the United States. He comes to us UH with a BA in economics from the University of Kentucky and a PhD from Ohio State. Lenn Keefer, Welcome to Bloomberg. Hey, happy to be here. So I've been following you on Twitter for a while. We'll get to that in a little bit. I just have to begin with your bio, which says, quote, I help people

understand the economy, housing and mortgage markets. That's a noble goal. But how can any single economists accomplish that? Yeah, very That's really tough to do. That's more of a mission statement. You know what I tried, How I try to organize myself, how you know, my public life, what I'm trying to do UH, and I think we have some success doing that. There's really sort of two areas where I focus on

to try to help people understand what's going on. Part of my role at Freddie Mack is to help, you know, be a company spokesperson to go out and talk to

you know, our various business partners. We have events where you know, we bring together real estate agents, loan officers, um others, and you know, those folks are often very active in the marketplace, but they want to hear, you know, from an economist, to get a sense of sort of a bigger, broader perspective on what's going on, what's happening in the global macroeconomy, and so helping those folks understand, give them our perspective from what we do in our

research and what we find, I think is part of the way we helped do that. And then a second hat I wear is to help folks inside the company. So at Freddie Mac, folks that are really thinking about sort of the mortgage market, the housing market in the United States very carefully give them sort of an economics perspective how to make sense of the trends, what's happening, and how the market maybe headed in the future. I left out of your bio that you were a professor

at George Mason. How did you transition from academia to Freddie Mack. Yeah, so it was it was an interesting transition, you know, I went to Ohio State, and after I graduated, I actually went to West Texas, Texas Tech University UH and was there as a tenure track professor in their program. My wife is also an economist. We met at at Ohio State and she took a job in d C,

and I decided that I would follow her. Better job opportunities in the d C metro than West Texas for economists, and so I followed her to the d C area and then eventually ended up at Freddie Mack. So I mentioned earlier your Twitter feed, you just fill it with these most delightful charts that a lot of other people don't use. It's not just this is the number of new homes that have been sold. They're very different, insightful reveals as to what's going on beneath the surface um

of the housing market. A lot of big companies, and I include Freddie Mack as really more of a private company. They're not so keen on senior people being out on social media. How have you worked this out with with Freddie Mack? Are they um encouraging or they nervous? How

how do you interact with them on the social side. Yeah, actually it was the Freddie mac Communications folks who actually encouraged me to actually get started on Twitter in particular, because we view it as you know, it's a great way to get you know, sort insights out. We do a lot of analysis, data analysis, A lot of that tends to get siloed within the organization. Uh and since we're already producing a lot of that in formation, a

lot of that is based on public data. I think those observations which are already things we did and sort

of other research avenues. I think we're Twitter was a great platform to be able to share that insights and information, and so they've been supportive of you know, me engaging in that and trying to get you know, conversation, go and share our insights, share our perspective, share some of the things that we're seeing in the housing market, because I think within Freddie Mack we have an interesting perspective.

We have a lot of data, a lot of really smart people, a lot of insights, and so distilling some of that down into the public conversation around the housing and mortgage market and the economy is I think well within sort of my role in the company, and they've still have been supportive of that, and your Twitter handle is at Lynn Keefer k I E F E R I actually the other day retweeted graphic you showed and the charts use They're just a fascinating combination of annual

color coded mortgage rates and then showing on a continual time. How do you how do you source these things? Are you're doing this old in the house? Where do you create these? Yeah? So I actually create a lot of them myself. You know, I'm a big fan of data visualization.

You know, asked earlier about the transition from an academic world to an industry world, and one of the key fundamental differences between an academic approach economics and a more industry focused approach is, you know, the really importance of being salient, being clear, and having a crisp communication and so in data visualization, which I think is really undergoing a renaissance, you know, with all the computing technology, all the great ideas that people have has really I think

shifted sort of where you know, the dialogue can be in terms of information design, how you present information, and so thinking about a new interesting ways to present the same data. Because you know, I've been working on our mortgage rate survey for close on five years now over five years, you know, we have a weekly mortgage rights.

Every week we have a mortgage rate. So trying to come up with what's a new perspective, what's interesting to see about that, what's a different way, How can I turn this data and try to look at it in a slightly different way to get a new insight um is challenging and so I think data visualization and building graphs and interesting charts is a way to do it. And the great news is is that there's a whole

ton of people out there who are active. You know, they share things either through blogs or social media on Twitter that give me a lot of ideas. And in the world we're in today, a lot of the code that they use to create those charts are open source, so it's relatively easy to pick that up and extend it, to tweak it, to apply it, you know, take something from genomics or biology and apply to economics and finance.

I think that's a that's a really rich environment. And so one of the positive aspects of the social media is the ability to sort of quickly share that information and to get it to a broader audience that what you might get if you're too siloed within you know mortgage finance. Well, well you do a great job. I'm absolutely um entranced by all of your UM graphics and

always tell people follow at Lynn Kiefer. Let's talk a little bit about the entire process of mortgage securitization, which really dates back to the post Great Depression era, back when mortgages were three years interest only and if you couldn't roll them over, well you were in deep trouble.

You would end up losing the house. That was a big part of what happens uh during the and following the Great Depression, and why we have mortgage giants like Freddie Mack and Fanny May tell us about the process of securitizing a mortgage. How does that start and and what is the thought process like when your firm is

doing that. Yeah, so, I think what's really important is sort of the interface between Freddie Mack and the primary market or the originators, the institutions that are actually making the loans, because we had Freddie or Fannie May don't

actually originate loans. We are active in the secondary market, but we're heavily involved, you know, with the originators in terms of sort of the types of products that are acceptable that we will you know, securities and will fund and so that sort of interaction sort of is very much sort of the sort of very beginning stages, even at the sort of underwriting and sort of the processing.

There's a large part of Freddie Mack who deals with you know, loan operations, how do how do we take on loans, how do we do how do we help the originators you know, underwrite their loans through automated underwriting systems often UH and then those loans get originated, and then we of course then put them into securitizations, which

we've been doing for quite quite some time. And what's been relatively new that folks you know that aren't active in the sort of this space might not recognize, but it was actually I think fundamentally important for how the mortgage finance system has changed over the last decade is that we have really begun to be active in a credit transfer market where trendy mac actually takes the credit risk associated with the mortgages, which traditionally we would hold

UH and distribute it through investors either through you know, senior sub securitizations or through reinsurance market and so that sort of those transactions, both on a single and multi family side, have really helped to sort of, you know, disperse the credit risk and sort of get it to a broader market, which can ultimately help to bring you cost down for taxpayers, uh, and also for you know, borrowers.

So let's drill down on that a little bit. And I know some people are listening and saying, gee, that sounds awfully complicated, but it really isn't quite as complicated as the as the jargon makes it sound. Banks originate mortgages, and these days it's primarily banks. Uh. They'll they'll write a mortgage, which means they're giving somebody half a million

dollars or so to buy a house. Now they have a piece of paper that says, we have a lean against this house, but the buyer owes US five thousand dollars. Now we're out of money, So if we want to make another loan, we have to sell that mortgage to somebody else, get the five thousand, and now make yet a second loan, and do that over and over again.

So the entities buying these mortgages then put them into a securitized product which they send cell to Wall Street and others who were willing to take broadly diversified risk it geographically and other factors in order to capture some sort of a yield. Is that am I oversimplifying that? Or is that pretty pretty decent? That's a great job

right now. That's so. Now let's talk about the next step, which I don't know how how much this existed pre financial crisis, and and we should clarify you've only been at for an iMac since after the crisis. You weren't there during that kind of crazy few years. That's right. I joined the company in October two thousand nine, which is about a year after the conservatorship, which is in two thousand eight, about a decade ago. So this credit

transfer risk, how does that operate? Who are the buyers of this and what are they actually um on the hook for when they're taking this risk? Yeah, so this

is very new. I mean there were attempts I think to start this market going, you know, in the past or even in the early two thousand's, but it really got started I think on the multi family side in two thousand nine, which would you know, risk sharing essentially between Freddie Mack and investors UH and then in the single family side around two thousands twelve or two thousand

and thirteen. And what this is is traditionally, under that model that you described where Freddie mac would buy the loans and then securitize them, the investors of those securities were really just buying interest rate risk. The credit risk was guaranteed so by the government's entity, by Freddy or Fannie UH, and so we would guarantee that the credit risk.

So in the event of the default, if the you know, borrower defaulted on their home UH, the investors would get paid back the principle, and so then the credit losses would be taken by the entities. UH. Since then, we've begun to realize that maybe holding all that credit risk and one single gigantic UH two single gigantic organizations may

not be the most efficient way to structure it. And so the idea was, well, how can we divert sell that to a diversified marketplace, just like with interest rate risk on the mortgage bonds. Could we sell the credit risk to investors? Could they understand sort of okay, what are the likelihood of default? How how would I understand that risk? Once they got a hand along that risk.

They may be willing to then uh purchase these credit risk transfer securities or reinsurance contracts where in the event of a default, it's not only Freddie Mcrofannie May that has to help make up the loss, it's also these other investors. So what do they get if they're paying for that, They're paying for the right to actually be on the hook if there's a credit to full what's the upside to them? Well, they get some yield in

that right, So they have to pay for that. So there's you know, the auctions, those bonds are are auctioned off, and so there's the market sort of in some sense it determines what the price of that credit risk is, which is is very new, uh, and so that's where sort of I think Freddie Mack was very much a leader in trying to get this market started, because initially folks really didn't have a sense, well, well, how do how does credit risks look? Uh? What what are the

losses may be gonna look like? And so back you know, uh early we started releasing a lot of information to investors, information on you know, mortgage historical performance data that was historically kept within the UH enterprise but actually we put it out publicly. It's actually available on the website. You go to Freddie Mac dot com right now you can go get a loan level file that gives you information on not only the loans that were originated, but also

their subsequent performance and even information on their losses. And that's very important for the marketplace so that they can then use that data, build models, analyze it so when they look at new originations, can use that historical data to get a sense for what credit losses could look like in the future when they're deciding, you know, what

to bid for these securities or insurance contracts. So in the old days, a buyer of a secure ice product out of the either Freddie Mett Mac or Fannie May was taking interest rate risk, and theoretically they were taking credit risk, but the assumption was the full faith and credit of the United States stood behind it. So really they weren't taking a whole lot of credit risk. Am I over simple? Well, I think a little bit. They wouldn't.

Even in the case of the traditional securitization, it's more counterparty or it's not credit risk on the borrower or the counterparty risk. Could Freddie Mcrofannie may pay their obligations. So that was really the rest of the assumption was that they had to implicit guarantee the assumption. Quite interesting. Let's talk a little bit about how Freddie Mack and the other government sponsored enterprises have changed post crisis. What what do you see the biggest changes at Freddie mac

have been. Yeah, so I think, you know, starting back, you know, at the tenure of our curren CEO, Don Layton, when he had come in in round two thousand and eleven or so, I think he really brought a real focus on culture of the institution of Freddie Mack and how you know, we could have a commercial minded focus.

He had come from Chase and JP Morgan and eBay, and so he brought a real commercial mindedness to the enterprise and a real focus on being an efficient organization, have an organization that was focused on customer with an eye to potentially, in some future state perhaps being more competitive than maybe we had been in the past. And so that really took some time to really get that going.

But I've really seen that go through the organization and and really I think about it in my work, how I try to bring you know, the economics to you know, either help our business partners internally or help folks you know, externally and really have that kind of I think a real customer focus, which was I think a real focus and direction there uh that we've certainly had, but it wasn't at the top, and that I think really brought itself down and really got folks really focusing on how

can we be efficient, how can we know help make this Freddie Mac better? While we are continuing to evolve. As I mentioned, we talked about the credit risk transfer, another innovative things that are going on as the market short of continues to change. You referenced UM the conservatorship which took place before you joined UM. Since that took place, Freddie Mac has returned a hundred and twelve billion dollars back to taxpayers, sixty more than they received during the crisis.

Is Freddie Mack giant cash cow? That sounds like that's a lot of money. That is a lot of money. I mean. Part of the thing that was interested coming to Freddie Mack from an academic is the scale Freddie Mack has. You know, I think over just over two trillion dollars in our guarantee portfolio. That's you know, mortgages that are in our securities. Um, a couple of trillion more and you'll be up to black Rock and Vanguard levels. Uh.

But you know there's a lot of zeros. Uh. And there's one in five roughly one in five home loans in the country. I mean, it's just a huge scale. Um, but a lot of sort of the uh you know, one in five home loans in the country. That's an amazing number. Yeah, I mean, it's just we have thousands

of seller services who deliver loans to us. It's just a huge operation on a very very large scale, which is some of the power of sort of the securitization and the ability to sort of tap global capital markets, which ultimately leads to benefits for borrowers. The thirty year fixed rate mortgage and the lower rates which are going to I think be a continued focus given sort of the markets has seen interest rates drift higher over the

last year. So I mentioned previously, you put up this lovely chart on Twitter about mortgage rates are now back to levels not seen since two thousand eleven. But really, by any traditional measure of mortgage rates, the cost of borrowing to buy a house is still relatively inexpensive, isn't it? It is from a historical perspective. We I mentioned we work on what we call the primary mortgage market surveys,

are weekly mortgage rate survey that attracts. You know, what's the third year fixed rate mortgage on average across the country. You've been doing it since seventy one? Approximately? What is a mortgage rate for the typical thirty year fixed these days? Uh, it's around four seventy four point seven five still under five now. I recall back in the two thousands, when mortgage rates broke five percent to the downside, people were like, oh my goodness, this is incredibly inexpensive. Have we just

gotten spoiled? We've benefited, I think from low mortgage interest rates. But one of the challenges is, you know, you think about where the marketplace is today and a lot of buyers showing up, our first time buyers, they were in high school perhaps or college when that was. They don't remember for them. You know, a mortgage even a four percent is relatively high and five you know, we we I mentioned we work on the survey. You know, we have some staff that help us, junior staff that are

relatively young. Uh. You know, I'm afraid we're gonna get a five percent mortgage rate. We may have uh, and they're gonna ask me, is this some dat air? Is this even possible? Uh? And so yes, from a historic perspective, long run rates are very low, but in the relative to recent years a little bit higher. So that raises the question how high can rates tick up before it begins to crimp the entire housing market, which is one

of the biggest sectors in the economy. You know, we have been seeing home sales, for example, increase year after year. We had the best year in a decade in seventeen, and when we started the year, we were forecasting to see a modest increase in overall home sales. In eighteen, rates rose u uh. And that has I think cool activity a little bit. You know, definitely, there's some momentum stalled a little bit in the summer of I think a lot of that had to do with the impact

of rates. Because the broader economy is doing very well. The employment market is very good, lot of job growth, we're seeing incomes pick up, confidence is high. The real two things are impeding sort of, the overall housing market it's high home prices and then high interest rates, which both make it difficult for potential buyers. What is the key driver of home prices is that demographics, the overall economy, interest rates, some combination what makes prices of homes go

up and down. Well, I'm an economist, I gotta say everything. But but in the current environment, I mean what what I believe and many other housing economists also believe, is that the real challenge in the current marketplaces of big imbalance between housing demand and housing supply. There's just not enough housing, not just homes, it's also apartments. Just overall, how housing in the United States, after a decade of slow building is still way below what we need and affect.

Some research my team is working on is to calculate just how far we are an aggregate short of what we need. So there's a there's a big imbalance in the housing market between supply and demand. The United States is just building too few housing units relative to what our growing population needs. Is not just single family homes, also apartments. And you see that in the rental market as well. So home prices and rents rising above income. Has been doing that for several years, and that is

creating a lot of pressure and housing markets. That's driving I think the primary factor that's driving higher home price. Let's delve into that issue of why we have now an undersupply of of both homes and multi family units. Some of it very regional, depends on a little bit of nimby. You look at San Francisco and parts of New York. People are reluctant to allow new projects to go up. They don't want their views blocked, they don't

want more concentration, more traffic. Some of it is uh not a whole lot of economic mobility is one of the issues that that we've looked at. But really the key question is we had so much overbuilding going on in oh four, oh five, oh six. Have we burnt off that excess supply? Are we now really running a full deficit relative to household formation? That's that's what I

believe now. There's a little bit to unpacked there, because if you took all the housing units in the country and we matched up all the people, there might be a little bit of balance. And what the challenges that a lot of the housing units that are currently available or in places where there's not a lot of jobs and so the fact that you have sort of a lot of you know, housing in parts of the Midwest and Northeast that are seeing population decline doesn't really help out.

When you have hot housing markets places like California or in Texas and some places, building is wrapping up, but it's still struggling to match. So you're seeing that real pressure. They're pushing up home prices. Is there anything we can do to facilitate the construt ouction of more residential real estate. I mean, clearly there's going to be in need as

our population continues to grow. There are things, um, and there's things In fact, Freddie Mack has been looking at in particular part of a small component, but an important components around manufactured housing, which in a lot of places about of rural areas, Uh, that can be a very affordable product. And so finding ways to finance that is I think an important contribution. Although in aggregate that's going

to be marginal. But you've got to start adding up marginal things because I think, uh, there's no national policy

I think that can fix it. On the supply side, a lot of it has to do with local zoning or a lack of labor uh, and so that I think we're seeing overall economy is shortages of labor across the board, really in construction because I know, again going back to the early two thousands, a lot of the construction workers might not have been here legally, and those folks will all left the country during the financial crisis and apparently have not come back. Is this still an

ongoing dreg on on home manufacturing. We absolutely lack of a labor is a key challenge. And part of the challenge is also the skilled labor that's available in the construction industry is also facing you knows, competing demands in terms of remodeling. We've got a lot of boomers. We've looked at sort of the housing stock as it is relative to the needs of a lot of seniors who are looking to age in place, UH, and they need to do remodeling to their house to make it sort

of conform to what they're gonna need. And that sort of competes away limited construction workers as well, because that's a relatively low productivity UH area. So that means you need more workers to do more a similar amount, and so that puts again more pressure. But across the board, home builders are having a hard time finding work skilled labor in particular that they need to match and ramp

up production. You know, I could always tell when we're later in the economic cycle when you go to higher contractors and other people just to put on a new roof, for do landscaping at a home, and the very difficult to find. But I noticed that much earlier this cycle, and I didn't put together, oh it's a labor shortage. It's not just that the the economy's heating up that that's really a very interesting observation on your part. Let me ask you a bit about the bifurcated housing market.

We've had a bit of a bifurcated recovery. If you were in the right geography or the right career or the right um education level, you did pretty well in this recovery. And if you weren't, you didn't. We see sort of a parallel development and housing. There are housing winning areas and housing not so winning areas. Are you

seeing something similar to those anecdotal observations? Absolutely? You know, we spent a lot of time thinking about home prices and what the trends are because I think it tells you a lot about what's happening, Uh, not everything, but it tells you a lot. And if you look at sort of the national home prices have been rising somewhere around six percent, depending on the particular index, but a lot them are showing a similar trend of around six

percent nationally. But you go to the subnational level, you know, to certain metro areas, it's easily double that. It's on fire, on fire, Seattle of Las Vegas, in fact, very very strong house price growth there, whereas you go to parts of the Midwest and Northeast, much more moderate house price growth. What conclusion should we drew about from that, Well, there are two things that we've sort of looked at at that. One is, for a lot of the young adults in

this country, these rising housing costs are real challenge. You know, if you're a homeowner and home prices go up a lot, while you get a lot of equity, but if you're a new potential first time buyer or renter, even higher housing costs are really just make it tougher. Already for a generation you know that's had I think a pretty tough economic environment. Sure, they came of age right in the middle of the financial crisis, and that leaves a lasting,

lasting impact. Absolutely. In fact, one of the things we looked at was what about household formation, because there's been a lot of trend of young adults doubling off they live with roommates or uh, non build spend parents basement as well. I mean, it's huge numbers. The percentages are might seem small, but you add of the numbers as

millions of people. Uh. In fact, we estimated that about if you look at the thirty four year old population, there's about one point six million fewer households than what you would have if we were living in an economic environment like the early two thousands. Now, I was under the impression that we've started to see that reverse, that new household formations are occurring, and millennials are getting married, perhaps later than prior generations, but the worst effects of

the Great Financial Crisis in that space are unwinding. Uh. Am I more or less right with that? Or I think so? I mean we're seeing that. Part of it is sort of is you have a shock and is it permanent? And if you look at life cycle evidence, Unfortunately, some of the evidence commosly looked at, it suggests that these effects are long lasting. They linger for a long

long time. They linger because you get behind in the job market, you take a come in at a lower salary, and that may have a permanent effect, but you are healing. Labor market is heating up. We've seen a lot of job growth and we are seeing even within our own data, upward trends the first time home buyers. So they are showing up in the marketplace. They're showing up his renters, they're showing up his home buyers. But they still got a lot of ground to make up as a group.

And so teasing out how much of that is just aging and how much of that is actual catching up as part of sort of the challenge and what economists like me can help sort of provide some analysis on UH And so we're seeing that. But if you think about the future of the U. S. Housing market, I'm

fundamentally optimistic. And the reason why it's because we have a large amount of pent up demand and if the economy stays, you know, relatively strong, we should continue to see that demand showing up over you know, the next few years. So let me take that in extent that to a different question. Market bottomed in oh nine, We've had a really long run since then, the economy has expanded, albeit below historic trend, but for a very long time. To me, then implies that this isn't the latter stages

that we're really ramping up here. I'm hearing from you. There's a ton of headroom in the housing market. This can continue to trend in a positive direction for a good couple or more years. It's not like housing is peaking and is about to roll over. There's a lot

of room to grow here, isn't there. I think so there is a challenge, you know, if rates continue, mortgage interest rates continue to rise, I think that will slow the growth, but there's still I think enough headroom that you could have modest growth over the next couple of years. In terms of home sales, I think housing construction has

a lot of room for improvement to match demand. You'll probably will see home price growth moderate just because from an affordability perspective, and as we get some more supply online that will help moderate the price growth. But I still think we're going to see a pretty good housing market over the next couple of years. If the economy is sort of stays on track. What can you tell us about how mortgage origination has evolved since the financial crisis.

I think one of the key factors is that costs pressures in the mortgage origination space have risen a lot

with increased clients cost but also other costs. The cost to originate a mortgage has increased quite a lot, and so you're seeing that it's quite a bit of consolidation in the mortgage space, and I think that may continue as some of the smallest players may find that it's been more economical for them to either merge, but in general sort of that's one of the areas where I think Freddie Mack can offer some help in the sense of trying to help provide technology and tools that can

help make the mortgage origination and then selling that into the secondary market easier, can help to relieve some of that cost pressure. I think it's fundamentally important things we've already been doing but are continuing to focus on that I think will ultimately help UH provide, you know, lower cost mortgages for borrowers. Can you stick around a little bit, I'll have a ton more questions for you. Absolutely. We have been speaking with Lenn Kiefer. He is the deputy

Chief economist at Freddie Mac. If you enjoy this conversation well, then be sure to check out our podcast after its where we keep the tape rolling and continue discussing all things mortgage related. You can find that at iTunes, Stitcher, Overcast, Bloomberg dot com, wherever final podcasts are sold. We love your comments, feedback and suggestions right to us at m IB podcast at Bloomberg dot net. Check out my daily column at Bloomberg dot com slash Opinion. You can follow

me on Twitter at rid Halts. I'm Barry rid Halts. You're listening to Masters in Business on Bloomberg Radio. Welcome to the podcast, Glynn, Thank you so much for doing this. I am a housing geek. I'm really fascinated by this topic. UM. I wrote a book for you that was the manifestation of of that geekdom, called Bailout Nation. UM. But one of the things that I think listeners should be aware of relative to the conservatorship of Fannie Mae and Freddie Mack was when the FEDS rescued the two g s s,

they put a whole bunch of conditions on them. They're not allowed to lobby Congress. There there's just a whole run of things they couldn't do for some reason they

couldn't remember. Congress never got around to putting the same sort of restrictive conditions on Bank America or Goldman Sachs or any of the other big entities that were lobbying every bit as aggressively as the g s S were a pre crisis, So they kind of imposed one set of rules for the g c s and ignored the bank's roles in lobbying Congress for some really, um let's just call a generous regulatory oversight that that contributed in

some way to the to the UH financial crisis. So a lot of questions that people who know who I am and what I've written about right around now, they're probably thinking, how come results isn't asking him any of these questions. It's because you're not allowed by congressional mandate to discuss that. Am I overstating that? Or aside from the fact you weren't there during the crisis, but there

are restrictions as to what you can publicly state. Are you allowed to answer that or you restricted on that? I can answer that, Barry. I mean one of the things I try to do, and I think It's important is to not you know, over specify what my expertise is. So I'm focused on the housing and mortgage market, the economy, the economics of that, um, the policy stuff that's really other groups if they need an economist to talk about

what might be the policy, you know, economic implications. I might do analysis, but but a lot of that is sort of not my area, and so I try to stay in my lane and focus on the economy or what the mortgage market is doing. Totally fair, can we understand that? So let's let's stay in your lane and stick to it. The one question I don't know if you can ask, but I think it's it's really intriguing. For a long time, homeownership was the cornerstone of the

American economy. Speaking generally within your lane, what are your thoughts about this? Is the housing safter still a key part of the economy. Is it going to continue to be for the foreseeable future? How do you how do you fit this into the overall um economic growth that

we're seeing. Yeah, you know, a couple of years ago, uh HUD Housing and Urban Development, they put together a publication invited some researchers to write on the provocative title, could the homeownership rate in the United States fall below what is it currently? And that was peaked almost like yeah, right in the middle of oh six O seven something like that. Yeah, yeah, I actually peaked an O four and then a no. Six again it sort of hit

around that sixty nine rate double top. But they were they were really focused on, Oh, this analysis was saying, oh, could the homeownership rate you know, drop two levels that we haven't seen since you know then I team teen fifties, and so we took that up and did some analysis to try and see and look at that and say, it doesn't seem the case. I mean, it may it's unlikely that the United States is gonna see a home ownership right back around six, given sort of demographics and

other forces. But I think there's some upward momentum because we've got an aging population that tends to have homeownership, and the populations that may have traditionally had lower homeownership rates may see that tick up modestly. And so I think that's an important part of sort of the American

you know, economic life. I think home ownership is not for everyone, and everything's not Everyone doesn't need to have that, but a lot of people aspire to that, and so making that possible I think in a responsible way is an important thing to do. But sort of a particular target or a number or something like that, I don't think that's that's the way to think about. It's really to think about. Is the economy sort of providing the opportunity for folks who have good credit who would qualify

for mortgage. Are they able to get sort of mortgage credit and financing? So you reference changes in some of them graphics. Let's dive into that a little bit. You know, if you bought a house in the fifties or sixties, you had a huge demographic tail wind at your back. Uh, and a lot of people who are retiring over the past couple of years got to benefit from a country that had I don't know, a hundred and fifty million people and now are well over three and a quarter

million people. What is the impact on housing if fertility rates continue to fall and we end up with a fairly level population. If we don't see population growth, well you have to replace old, decrepit homes. But really that's a key driver, isn't it. That's absolutely the case, Although I think we have to a little bit of caution. Right back in the eighties or nineties, some economists wrote sort of looked at the housing marketing, we're suggesting, oh,

the housing markets gonna crash in the nineties. Uh. And they were think based on off of historical demographic trends. But what they didn't account for was the fact that people were living longer and healthy lives. And so one of the key things we've seen is that, you know,

the boomer generation has been the healthiest generation. They are living longer, they're intending to live longer, and so you're not gonna necessarily see the same falloff in you know or supply coming online from you know, boomers you know moving to you know, out of home ownership or out of their apartments. Uh, that's probably not gonna happen. Where it will happen later. Well, well, now, let's assume the longevity factor is part of the demographic question. Wouldn't that

just change the type of home ownership. You'll see more people in either active retirement communities or assisted living facilities, or communities where you still own your own home, but

it's geared more for a different age lifestyle. You may although I think that's a little bit later because the boomers as a generation, some of them are still I think the youngest are still in their fifties, so they still have I think the active lifestyle is more like if you look at the amenities for example, UH folks, economists have survey's sort of folks in that fifty five plus generation, what are they looking for in terms of housing, Very similar to the basket of sort of amenities that

UH millennials want, with the sole exception they're not looking

for so much for playgrounds. But but but overall, you know, they're they're looking for the same basket and they are broadly speaking much healthier, and so they're sort of not moving assisted living and that sort of that that end of life is in his generation is more you know, several decades out in terms of where the boomers are in general, and so I think that's gonna boost overall demand effects of an an economists in our department have looked at that, and it's going to have a very

large effect on sort of taking supply that would otherwise be available for millennials out of the market. And that's why I believe housing markets still needs to build more units to supply the population. So you're not seeing demographic headwinds like a number of people. Harry Dent is one some other people have written, you know, the coming population crash. Um, you're not seeing that sort of thing anywhere off in the future, not in the not in the twenties. Perhaps

in all right and um. You had mentioned previously multi family mortgages, way back when the typical Fannie may or Freddie Mac securitized mortgage was a single family home. Tell us a little bit about when the idea of multi family financing came about. Oh, well, I think there's different opponents, but I think one of the important innovations that that was made was the credit risk transfer. We talked a little bit about that about selling to investors. The credit

risk actually started in our multifamily division. They were ahead of the single family in terms of placing those those more mortgages into securities. I believe it was around two thousand nine we started what we call our K deals, which were those multi K deals. That's just the name of the security that securitizes multi family loans and sells

that credit risk to investors. How big aspect of the business of Freddy MCCA are multi family mortgage securitization H I don't have the number on the is it one, I let me react. Is it a tiny niche or is it UH half decent and growing slice of the business. It's absolutely been growing. I think Freddie has been the largest supplier multifamily financing in the overall marketplace in recent years, and we've senancing or securitizing other fundings providing funding for

the multi family market. If you look at sort of how where does the funding for multifamily UH apartments come from? You can look at life insurance companies, banks, uh, Fannie MAE, and Freddie Macfreddie I think was the largest single source of funding in that marketplace in certain recent years UM.

And so that's been a large and growing business. Now compared to our single family business, it's relatively small, just because the single family business is a lot larger in terms of the overall sort of mortgage finance for the

United States. One of the things that was pretty obvious when we looked at the data post crisis was that, well, you have certain number of these existing homes and typically UM when you look at existing home sales, new home sales or something like a sixth or a seventh of that, But the big change was the rise of of multi family homes, apartment buildings, any sort of rental as opposed to ownership. Is that trend continuing or is that kind of leveled off? As as the economy has gotten better,

I think you're starting to see a very beginning. The data is and all all there. Yeah, I would sort of have to see, but I think you're seeing some leveling all for sure. There isn't so much as a movement as we saw back in the early crisis. Here is two thousand ten, there was a big shift of single family homes, for example, from ownership to rentorship. Some of that has remained in rentorship, but you're seeing the

home ownership break take off a little bit. We may continue to see some some uptrend there and some shifting of those homes, but not in any big way in any data that I've seen. One of the cheapest sectors of the US stock market has been the home builders. They are unloved and unwanted, and therefore are very inexpensive. If if you were going to make a bet as to when home building might start to revert back to normal,

when we look at a long term chart. We're still below the levels that prior recessions bottom Dad, if you go back forty years. It's amazing that not only did we hit the level where we usually you know, um touch basement during recession, we went straight through it and down below and we still haven't gotten back up over those levels. It's it's quite astonishing. Yeah. Yeah, you mentioned

some of the charts that I share on Twitter. One of my favorite recent ones because it was striking to me when I put this together, was to look at the housing supplies. You add up single family homes, apartments, manufactured homeshipments in the United States, which the Census is tracked that since nineteen and you ask sort of for full year, the US added about one point to five million units, which is up from every year since two

thousand eight. However, if you compare that number against all of the years prior to two thousand eight, only one year, one single year, did the US add fewer overall homes, apartments, and manufactured homes. And that was two when mortgage interest rates had spiked the FED was trying to kill off inflation, uh, and folks were really struggling in that year. So, which is the best year in all about a decade, comparable to two in terms of the overall level of building.

That's that's there's some room for improvement there. I'm scrolling through your Twitter feed looking at housing supply and it's it's the wrong thing to search FORO because every other chart has it. But there are really some amazing data points um between population growth and unemployment rate and home prices. It's fascinating. I want to reiterate to listeners that they should they should uh follow you on Twitter because you really put up a tremendous run um of charts. They're

really quite fascinating. So, um, let me let me ask you a broad question that I didn't get too earlier. If you had to pick this single most important development in the housing finance system over the past decade, what

would that be. I absolutely think it has to be the credit risk transfer, because that's really changed the model for you know, the secondary market financing taking a tremendous amount of credit risk that was concentrated and Freddie Mack and Fannie May and now you have distributed broadly, which I think has the potential to really, you know, reduce overall risk and the overall housing or finance system by creating diversification and so that getting investors comfortable with that,

getting them to actually, you know, take on that and invest in those securities. There's been very brisk demand for those. I think has really I think changed fundamentally sort of how the US housing finance system operates and how it will go look going forward. And that's a cost efficient transfer mechanism. It seems kind of complicated to maybe because it's it's a little new and I'm not familiar with credit risk transfer, But how how efficient is that? Yeah?

You know, I think one of the important things is getting investors, you know, confident about sort of the data, confident about the housing market. One of the things I did recently, you know, is travel and spoke with you know, to UH investors in that marketplace. So we've at different events to help folks sort of understand better sort of how the housing market looks. How do you think about that?

How would you understand historical data? All of that. I think that's where communication and getting that data and information out there is fundamentally important. Because you have more transparency, Folks can analyze that data, they can look at it, they can build their own models. That's going to create, you know, a better confidence in the marketplace and sort of the willingness to take on that investment. Quite interesting. So this current dare I call it a housing boom?

I don't know if I could call it that, but this most recent leg up in housing despite higher interest rates. Um, how is this different than prior economic cycles? What what

makes this housing cycle somewhat unique? I think the major difference is just the depths to which housing construction fell off, and so the fact that we built so few units for so long helped to correct for some overbuilding in certain markets uh last decade and then even more so, And so that I think creates a little bit different in terms of the sensitivity because you have not only that lack of building, but you also have this tremendous

demographic tail wind from the millennial generation, who are really hitting those peak home buying years right around now. We're actually a couple of years later. That's why I'm still optimistic about the next couple of years, because you know, the median age of the first time HomeBuyer is about thirty one, I think the meeting age of millennial nine.

So you still got a couple of years of really to that peak demand really starts hitting the housing market, and so that I think has helped the overall market remain robust despite higher interest rates and very rapid home price growth in lot of markets. Quite fascinating. I know, I only have you for a finite amount of time. Let me jump to my favorite questions that I ask all of my guests. Tell us the most important thing

that we don't know about you. Yeah, I think now people who know me personally will know this, but in general, sort of in public, they may not realize this is that, uh my, I'm probably the second best economist in my household. That when I come home, my wife she's also an economist. She works actually around housing related issues. She had you know, credit risk and things like that. She's a real expert

on that. And so when I when I come home, you know, I have great discussions at work, but I can have other discussions you know at home talking about statistics, econometrics, things like that. Uh. It's real, you know, exciting talk

there at home, dinner table conversation. But uh, and that I think is really like I kind of I think of it as a superpower because it's really you know, gives me sort of a real rich, I think perspective on things because she's also very you know, clear to all me sort of when things are kind of nonsense and I'm not making a lot of sense. So she has that that perspective, which is great. I was gonna ask, how often are you to fundamentally disagreeing about basic tenants

in in the housing market? Uh, not not too much, because she's often right. So I'm I listened to her very carefully. You've been married for a long time, I could tell. So tell us about your early mentors who helped guide your career. Yeah, there too, that that I

would come to mind that I think are particularly important. Uh. If I look at my sort of graduate training at Ohio State, Bill Dupor was my advisory, my thesis advisor sort of really helped train me and sort of understanding and thinking like an economist to bring sort of a macroeconomic perspective and understand sort of the models and approaches that economists use. That was very important sort of forming

sort of my thinking as an economist. But then very important was when I started at Freddy Mack because we talked a little bit about sort of transition to industry, and here I was this guy I uh come to the market, I was didn't have a lot of industry

experience that had some kind of theoretical stuff. So my first hiring, the guy who hired me a Freddie M guy named Dave Roda is still there, uh in a different role, but it was really helpful in getting me sort of transition to industry to help understand sort of think through sort of how the industry is working, how the business people are thinking as an economist. He's an economist too, uh, And I still see him at lunch sometimes and I always have a great conversation whenever I

see him. Interesting. Uh, what about investors who influenced the way you look at housing, real estate, that entire market. Yeah, so there are a lot of folks at freddie who sort of have a lot of expertise about capital markets

and that execution, you know. As the economist, I some types of some exposure to that, but I really got a lot of information from that from our former chief economist, Sean mcketty, who he's moved back to the capital market side, um, and so he sort of had a lot of perspective and information on sort of how sort of the capital

markets guys are thinking. You know, he'd worked on the street, So how does you know street investors think about stuff, which, um, as you know, from a pure economics background, I didn't have that same perspective. Had a lot of great stories about how things went, and so that really I think provided a lot of uh valuable insights into how sort of folks are thinking and even today how they're thinking, because I can ask him what he's seeing. So let's

talk about everybody's favorite question. Tell us about some of your favorite books. What do you read, be they economics or housing or or not fiction non fiction? What are you enjoying? Well, I don't know how you separate the economics from the fiction. Uh. Sometimes that's certainly can be a challenge, you know, I mean, this is the stories. But actually I think there's one book I think is

really important, uh, that I really appreciate. I come back to constantly is a is a book called The Visual Display of Quantitative Information from Edward Tufty, who was a

professor on data visualization. You mentioned my charts, sort of my sort of beginning to come to to to put those together was attending one of his Uh, he does seminars and reading his books and really was an eye opener for thinking about how can we know as a data analysts scientists to think think can communicate that information to an audience with clarity and precision, but still have a lot of complexity and insight. His his work is

always fantastic. That book is still a regular seller on Amazon, and it's something like fifty or sixty hours. It is not an inexpensive book. The The other one of his that I have at home is Information is Beautiful, which is really a lovely a lovely exposition any other books you want to mention anything else you're reading just for fun,

well for fun, but it's been helpful. There's a book by Stephen Pinker called A Sense of Style, which because a lot of what I do is communicate, And one of the sort of areas that I'm really focused on and thinking about a lot is how can I be a better you know, presenter, How gonna be a better communicator? How can be a better writer? And and in that book, um, he has there's a lot of great stuff. There were one part in particular that I think applies to economists.

I share it with my team when we talk about how can we communicate to our business partners the general audience is this idea of the curse of knowledge, where when you, as an expert know something, you have difficulty imagining what it's like not to know that. And so that a lot of like why do academics right terrible? Was the curse of that because they know a lot and they can't have a hard time empathizing with folks

who don't. And so keeping that in mind and having that empathy, I think is key to becoming a better communicator. And so I really enjoy that exposition and other stuff in that book is is great too. There is a famous VC and I won't name drop, but he refers to something very parallel, which is when they have start

up entrepreneurs requesting um venture investments. He goes one of the he had mentioned one of the things he noticed was the tendency for people who really understood their space and they saw the whole tenure vision to be frustrated that the vcs, how could you not see this? It's so obvious? And now I'm contextualizing that as the curse of the curse of knowledge. That that's quite fascinating, and some of us are more cursed than very funny. Um, what is it about the housing market today that has

you excited? Well, so the housing market overall, I mean, I think there's the potential. We talk a lot about demand if I think about it for more from an economist shop or industry shop, I think there's a huge amount of data and information that we are just at the beginning of. You think about big data, the type of information that is becoming available or is available that has not yet been fully tapped in mind, I think that is a huge area of growth. That's an area

focus at the firm. Area of focus for myself from a machine learning data analysis programming, how to deal with that information and how to consume it, how to think about it. The economics profession is starting to come to grips with how do you model that, which I think we're a little slow, I think in some of those areas, But there's a lot of exciting work in that dimension, and I think it is only going to grow in

ways we cannot even imagine today. Quite quite interesting. Tell us about a time you failed and what you learned from the experience. Yeah, So when I came to from Left Texas and came to the Washington, d C. Area. I was unemployed for about fifteen months between sort of my professor job and getting hired on at Freddie. You know, there's a lot of times where I was sort of looking for a job. Now it didn't help that I was.

That was in two thousand and eight and nine, when the economy was in a very tough spot in UH finance was sort of particularly an industry that was in a lot of distress. But you know, I had a hard time. I was coming from an academic background. There weren't academic jobs, wasn't I was trying to transition into industry and really just sort of not matching up, not able to communicate clearly to the to the potential you

know jobs. I think I would have been able to do a lot of jobs with the opportunities were tough. It's very competitive, and so continuously sort of coming up short, you know, and then doing that for a long time until finally, as I mentioned, David Freddie gave me a chance. Um with some resistance. I think internally they were skeptical in the group. I think I want them over eventually, but you know sort of how how I would turn out, and so I think that sort of experience. It gave

me a little bit of edge to think about. Okay, maybe I could be you know, unemployed again, So how would I keep myself competitive? How to keep myself uh, sort of avoiding that, you know, that idleness for a longer time. Interesting. So what perspective changes in the mortgage market are are you looking forward to? What what do you think is the next set of changes that could have a big positive impact. Well, as I mentioned, I think this data, the data, integrating this data and information.

I mean there are tons of information already collected that could be used either to help streamline the process of origination to or costs. I mentioned origination costs have risen a lot. Could we unlock that? I find ways to to use information technology to streamline the processes. I think we're getting some traction on that. But I think that and then tapping that information to effectively understand credit risk, to understand where the market may be headed, I think

is enormously important. So what do you do outside of the office for fun, to relax, to just kick back? Yeah, so, uh, I like to you know, do programming on the side, not economics. You know, some of the stuff on the Twitter is actually just me sort of messing around, playing, exploring the ideas. I have two small children who have plenty of ideas for what I could be doing, but they know they're great fun. I mean, I have a

have a blast hanging out with them. Uh. And then you know, trying to find some time with the family. I think that's that's I really precious, especially as the kids are so young now and it doesn't last so long for sure. So let's talk a little bit about career advice. If a millennial or recent college grad came to you and said, I'm interested in the housing slash mortgage market, what sort of advice would you give them? Um, So if they were an economist or even a financial analyst,

which is a lot of the roles. We actually um work with some new hires in the company in different aspects, and so I do talk to some of some folks. Or we have a rotational program where uh, new college hires will come in and they'll rotate through different groups for about six months at a time. It's a great program where they can learn sort of what happens at Freddie Mack. What are different roles accounting, finance, and sometimes

they hang out with economists UH and work UH. When I talk to those folks and folks that are interested in going forward in the career. From my perspective, one of the best skills to have and to be able to sort of leverage is sort of quantitative sort of programming, statistical analysis, UH, and sort of that sort of area. So anything you can do to pick up some programming, I think is incredibly important in particularly if you want

to go in an analysis role. UH. On understanding statistics if you're thinking about going into an economic makes more applied role. More you know, applied statistic econometrics is hugely important. That that is probably good advice for any field, regardless of whether or not it's it's finance related. A little bit of programming, a little bit of statistical analysis goes

a long way. And our final question, what is it that you know about the world of mortgages and securitization and real estate today that you wish you knew fifteen years ago when you were really just getting started. I think it's an enormously complex field, and I think the ability to distill complex things, not make them extra complicated,

but actually make them simpler is enormously important. And so when it started out, I was really you know, focused on the complexity because that's from an academic background where you go. But really people don't have time for that, you know, in the industry. They want to have answers.

They got a lot of pressures. And so finding out you know, really having that uh empathy, sort of avoiding the cursive knowledge as you speak, but to try to really get to the heart of the problem quickly, uh, and the amount importance of that, like number one, almost number one, And when you're approaching a problem or you're gonna meet with someone is trying to really get to the point and really focus on the answer and deliver on that, and to have some sense of what they

know and what you know and they don't know, uh, to sort of align that, to have a real appreciation for that and how that can take. You know, if you have an okay answer, but you combine it with great, you know, clearer communication is sometimes a lot better, often a lot better than having a fantastic answer than nobody can understand. Right. Um, never let the good the perfect be the enemy of the goods, so to speak. Quite quite interesting stuff we have been speaking with Lynn Kiefer.

He is the deputy chief Economist at Freddie Mac. If you enjoy this conversation, we'll be sure to look up an intro Down an Inch on Apple iTunes, where you can find any of the other two hundred and twenty plus such conversations we have had over the previous four plus years. We love your comments, feedback, end suggestions. Write to us at M I B Podcast at Bloomberg dot net. I would be remiss if I did not thank the

team that helps put together this podcast each week. Attika val Brun is our project manager, Medina Parwana is my producer. Taylor Riggs is our booker. Michael Batnick is our head of research. I'm Barry Retolts. You've been listening to Masters in Business on Bloomberg Radio.