Takeaways from Dr. Douglas Duncan, Chief Economist of Fannie Mae

We had the wonderful opportunity to host Dr. Doug Duncan for lunch and his evening speaking event this past Thursday. We are fortunate and humbled to have Doug take time from his busy schedule to engage with our investment community. He spends a lot of time keeping Fannie Mae in touch with the real world and its needs. 

Here are my takeaways from Doug's visit.

• In 2 years, this will be the longest expansion...ever.
• The Fed portfolio grew from about $2 trillion pre-crisis to about $4.5 trillion post crisis. They have recently begun shrinking it. The $1.8 trillion in mortgage assets they hold came in significant part because Fannie and Freddie have been mandated to shrink their portfolios 10% per year to $250 billion maximum. We don't know who will buy and at what price as the Fed shrinks.
• Millennials are finally buying houses! This is due to the vast majority of them going to college, delaying their entry to the workforce, and their delayed family formation. Despite this, we still currently have the highest percentage of adult children living at home ever.
• Boomers have $6.5M in equity, and many are choosing to stay and remodel their current homes rather than selling, therefore contributing to the lack of inventory of homes for sale.
• Reduced immigration would weaken the economy, especially in sectors that have a shortage of skilled labor. The current birth rate is 2.1 with immigration, and would be 1.9 without (less than what is needed to replace 2 parents!).
• House prices are appreciating at 4-5 times the national historic average. This appears to be driven by economic fundamentals rather than being a bubble. Loan requirements have increased, and the prices are largely driven by the huge supply shortage of about 500,000 homes per year.
• US healthcare is the largest federal obligation. For there to be true national debt reform or tax reform, there needs to be healthcare reform.
• Economic stimuli are distinct from reform. Temporary changes only change consumer behavior temporarily. Reform causes people to make permanent changes.
• Phasing in tax cuts delays action and effectiveness because consumers wait for the full benefit before acting.
• Understanding US interest rate movements requires attention to the combined balance sheet of the US, UK, EU and Japanese central banks. Whether they move together or not can determine where capital flows and at what yields.
• Jay Powell, who Doug has met with, was nominated for Fed Chair. His background is practicing law, not being an economist; however, having managed a large hedge fund gives him a lot of financial management experience.

Stay educated and best to your investing,

- Tom