Two years of a booming U.S. housing market have brought great wealth to many, while others are now locked out or unsure about their next steps. Are there similarities to the housing bubble of the 2000s -- or are these new, uncharted waters? Dr. Len Kiefer, deputy chief economist at Freddie Mac, joins the podcast to discuss the factors that led to the current state of the market. He also shares what to watch for in the future and offers advice to prospective homebuyers.
Below is a full transcript of the conversation, including time stamps. Full audio is posted above.
Mohamed Younis 00:07
For Gallup, I'm Mohamed Younis, and this is The Gallup Podcast. This week, we take a closer look at the housing market and whether real estate continues to be the go-to for Americans looking to invest their money for the future. Dr Len Kiefer is deputy chief economist at Freddie Mac. Len, welcome to the podcast.
Len Kiefer 00:26
Hey, thanks so much for having me. Glad to be here.
Mohamed Younis 00:28
We recently found through our polling a record-low percentage of Americans saying now is a good time to buy a house. But they still maintain that real estate is the best long-term investment one can make in this country. Give us an idea, Len, of how the housing market got to where it, this kind of chaotic moment we're in right now.
Len Kiefer 00:50
The U.S. housing market is really at a very pivotal point where we are today. Mortgage interest rates have increased to the highest levels in over a decade, and it's really the rate of increase, the, you know, the speed at which rates went up, is really only matched in intensity by what we saw in the early 1980s. And like in the early 1980s, the United States is facing, you know, high rates of consumer price inflation, although the causes are a little bit different now. We're, you know, coming through a global pandemic that is still, you know, ongoing -- although, in terms of the economic impact, many, has subsided. But we're still dealing with the consequences, as that sort of ripples through the economy and continues to dislocate supply chains and makes that challenging, which is putting pressure on, on consumer price inflation and making the macroeconomic environment, you know, an overall challenge for the housing market in particular, as the mortgage rates move higher.
Len Kiefer 01:46
At the same time, we've seen this massive shift in where people are living in the country. The pandemic opened up significant new remote work opportunities that allowed, you know, many workers to move out of, you know, higher-cost coastal markets to less expensive markets, or at least less expensive for themselves, in the Mountain West and South. And that's put pressure on the home values in those markets. So, you sort of have this mix where cost pressures, inflation have contributed to higher mortgage interest rates at the same time strong demand for housing has put upward pressure on prices. So, and you see that reflected in some of the survey data is that folks that are, you know, active in the market, are looking to purchase a home or rent, find, you know, a real pinch in terms of affordability, a real challenge for them to find a home if they're competing in the market to buy. At the same time, interest rates are up, which make the cost of homeownership that much more of a challenge for prospective buyers.
Len Kiefer 02:43
Yet despite that, despite those challenges, there is still very strong, you know, overall housing market demand. We have a very large millennial population that is coming of age that's driving, you know, first-time homebuyer demand, keeping the pressure on markets. All of that comes together to where we are at this moment, where we see interest rates up quite a bit from where they were a year ago, house prices up quite a bit and rents as well. So it's just, it's an overall challenging environment, and that is, you know, very different from where we have been over, I'd say, the last decade.
Mohamed Younis 03:16
And I'm happy that you mentioned rents as well, because we do want to talk about those who are renting, as millions of Americans do, and they're also impacted by the state of the housing market. When you talk about high prices in housing, I'm 41, almost, I'm going on 42 now. When I hear "high prices in housing," I immediately think of 2008. Explain to us how this moment is different than that moment. Are we, in other words, are we in a similar kind of a bubble situation? If not, how is this different?
Len Kiefer 03:51
That's a really important question and something that, you know, at Freddie Mac, you know, we think a lot about, because you're thinking about risks in the housing market. And obviously, if you are studying the history of the housing market, then the 2008 global financial crisis is a very important episode to study and understand. And like that period of time, we've seen house prices -- or the period preceding that -- we've seen house prices move up quite a bit. But there are very important fundamental differences between the economy and housing market today than what it was prior to the global financial crisis. I think it's helpful to have a framework -- you asked about a bubble, right? A lot of people ask that question: Is housing market in a bubble? Are these prices unsustainable? And it's helpful to think what that even means. And we developed a framework in some research that we've put out, and I think it's useful to this day to think about, OK, what do you even mean when you're talking about that? And how would you know, if you're in one at the present time?
Len Kiefer 04:46
And so when we analyzed, you know, historical episodes and thought through what are the really defining features, we came up with three key features that would be key to understanding whether or not you were in a bubble or ex-post, you know, after the bubble, at least knowing that you had been in one. I think the No. 1 factor is the bubbles need to pop, right. If asset prices go up and up and up and they never pop, then, I mean, it's hard to say that you were in a bubble. Now, you won't know that until things progress forward. But the other two indicators, you can get some sense in real time and things that we monitor very closely. No. 1 -- or No. 2 -- you would want to, you'd need to see some element of speculation. So in 2000, the mid-2000s, many people were speculating in the housing market. You saw that in investor activity; you saw that in folks who were purchasing multiple homes, hoping to flip them to turn a quick buck, right, in the housing market.
Len Kiefer 05:43
While certainly there's always people in the housing market that are purchasing and hoping to, you know, make a capital gain, really, the demand these days are being driven by a lot of those first-time homebuyers and this ginormous population of young adults that are coming of age, have come of age and continue to enter the housing market by the millions every year. And so that that first-time homebuyer demand, you see it. And it's very important if you compare the rental market to the homeowner market, we see strength in both of those, in terms of the number of renters and the number of homeowners in the market. So that, that's a sign that tells us that this demand, a lot of it, is organically driven by household formation, not speculation.
Len Kiefer 06:23
No. 2 -- or No. 3, the third component -- is credit, right? You need to have, if you're gonna have, how does a bubble work? Well, you get people speculating about prices continuing to go up. They are hoping that that will continue. Credit fuels that, drives expansion, drives activity, and you see sort of cracks in the foundation, if you will, in terms of what types of activity goes on. Well, if you look at credit conditions in the mortgage market today, much more solid underwriting; the loans are fully underwritten to the income, where we're products in the mid-2000s where borrowers would, you know, have a teaser rate -- a low introductory interest rate. The mortgage would be adjustable rate, and actually under, you know, given their income, it probably was not realistic to hope that they could sustain that mortgage.
Len Kiefer 07:09
But after 2008 institutions were changed in the mortgage market, and now mortgages are fully underwritten. The borrower's income needs to be there to support the mortgage, have the ability to repay. And just a lot of the riskier products that were really common are no longer in the mortgage market at all. And for example, just one of them, that's, I think, very important in today's economy is if you look at adjustable-rate mortgages. In the mid-2000s, close to four in 10 in 2005 mortgages were, head adjustable rate, which means if interest rates go up, the payment on the mortgage can change quite substantially.
Mohamed Younis 07:41
Wow. Four in 10. That's a lot!
Len Kiefer 07:44
Yeah, yeah, it was, it was quite a lot. Whereas today, it's, it's nearly all overwhelmingly fixed-rate mortgages. And what that means is that while interest rates go up, it doesn't affect the payments of existing homeowners, right. They've locked in that payment; they're not exposed to the risk of having to reset at a higher payment and potentially run into issues there. So that that provides a lot of security and balance in the housing market for those homeowners. That's very different from where we were in 2008.
Mohamed Younis 08:12
And that does, that really clarifies how it's different. Are we still living through the pain points of what happened in the 2008 recession? Some people argue that, and it sounds like what you're saying confirms or supports this notion that there's generally like housing drought. There's like, there are not enough new builds for all the people that want to buy a home, all the families that are looking to buy a home. Is that true? And how much of that is kind of the tidal wave that we're still feeling from that period?
Len Kiefer 08:44
I think that's really important, and a really important fundamental feature of the housing market where we are today. We've done research looking at, sort of, look at our population. How much housing is, is demanded and how much housing is available? And we find a really significant gap. You know, if we look at the age profile of the American households and we take into account you know, where their income or how, how much they're working, you know, older Americans, living longer, healthier lives, all of that puts together enormous demand for housing. And we have not kept pace with building. A lot of that is a result of the recovery that was very slow for the housing market from 2009, you know, forwards. You know, the rates of construction now are at levels that are helping to fill that gap, but it's a very substantial gap. It's in the order of two years of housing production. In the end, you gotta account for new households that would like, you know, are coming into the market, as I mentioned, by the millions, year by year. And so that that's put all this pressure.
Len Kiefer 09:42
And so yeah, we never, you know, recovered. The building industry took a very long time. You know, now we're seeing levels of construction that are, you know, you know, more in line with historical averages, especially once you account for our population. But we need to build more than that to sort of fill in the hole. Right? We have this, this backlog -- this missing construction, a lot of it unavailable, you know, housing. And so what the result then is, fierce competition in the market for what is available. House prices go up, rents go up. And some folks that, you know, would like to buy or rent find that, that hope frustrated because of the higher prices and the higher rent.
Mohamed Younis 10:22
That's a perfect segue to my next question. And really, in many ways, the most important question: What is your best advice right now, Len, to people that are looking to purchase a home? I could imagine it's a pretty daunting thing to hear that we're at the highest interest rates in X number of years. What's your best advice to families right now that are looking to purchase?
Len Kiefer 10:45
I think the most important thing that a prospective homebuyer, particularly if someone is new to the market, but even if you're a repeat buyer, should keep this in mind. Because a large number of Americans don't shop for mortgages. And what I mean by that is they only talk to a single lender and don't consider the potential that they might be able to get a lower interest rate. At Freddie Mac, we run a weekly mortgage interest-rate survey. It reports a national average rate. But around that average, you know, there's a lot of variation. It can depend; there could be different products. Lenders may have different programs that are, they may be better suited for what your particular needs are as an individual. They may be more competitive, particularly in, in a world where lenders are being, you know, are feeling the pressure of higher rates, they're competitive. And you may be able to get a better rate if you shop around. And a shockingly high number of Americans do not shop around. So I think that the research has shown that if you do that you could benefit.
Len Kiefer 11:42
Now it's not a guarantee -- you may get, be lucky and get a very good rate initially. So that that could be the case. But certainly, given the size of the investment, you know, the mortgage is a big portion of many, you know, Americans' wealth, but it's also a big part of their payment. And the size of that transaction is very large. It makes sense that you should, you know, take that with a lot of, you know, consideration and think about that carefully, and that should be to look around. And a lot of borrowers just do not do that. And I think that relates also to, you know, given the daunting nature of the purchase, right, there's a lot of resources available that folks can find to educate themselves and to learn about the process. It does seem confusing. There's a lot of parts, especially if you're new, if you're a first-generation homebuyer; if your family, you know, were renters and that you're going to make the leap and you're being a buyer, and we're seeing that in the data for sure -- they might want to get some additional help. And there's a lot of resources available that folks can find who, to educate themselves, to learn about the home buying process, the mortgage process. I think if you're coming into that market, you're not alone. There's a lot of resources available, and to go out and try to find them shouldn't be too hard. You know, Freddie Mac's got resources, but many others as well, to just give them the education, give them the information and help them, guide them through the process.
Mohamed Younis 12:58
That's great advice. And you're right, man, I'm, I was a first time homebuyer recently. And it was, it's quite a process. I mean it's not an easy thing, and shopping around isn't the first thing that comes to mind when somebody says, "Hey, like I can approve you for this much money!" You're like, "How much money? Oh my God! That's awesome!" And you're so excited to buy home, but you forget, yeah, you could get a, maybe get a better deal somewhere else. I want to ask you now about renters. We've been talking a lot about people who are looking to buy a home. Does Freddie Mac care about people who are renting? I think most of us think about you guys when we think about purchasing. Talk to us about renting and how that's different in this market and how you guys are helping those folks as well.
Len Kiefer 13:44
Yeah, I mean Freddie Mac is one of the largest, the largest source of financing in America for multifamily lending. So we take very serious the renter, right. That's a big part of the housing mix. Homeownership isn't right for everyone at all times, but, you know, folks that want access to good quality housing, renting is, you know, a big part of that in the American, you know, you know, housing system. And we definitely, a lot of people at Freddie that I get an opportunity to work with really care a lot about that and providing, you know, good, you know, rental housing for Americans, and that's a big, big deal. So we think a lot about well, what, how do we provide that? And what are the, you know, sort of options out there? And how can we help to finance, you know, more housing for affordable for millions of American renters?
Len Kiefer 14:26
The challenge for renters in this market is, it's very tough economy. They don't benefit from the home equity gains, right? If you're a homeowner and you see house prices and rents go up, well, you've got a wealth effect, right? You're now wealthier -- at least on paper, right? You've got that, you can draw from that; you can cash it out, potentially; draw home equity lending or sell your home, right? But if you're a renter, you don't see that, that wealth gain. And you also -- if the market is very tight, like it is today -- you also see your rents increase, right? I mentioned that homeowners, many of them have fixed-rate mortgages. The vast majority of Americans, homeowners, today have fixed-rate mortgages, which means they've locked in their payment. Whereas for renters, you know, depending on their contract, may only have it locked in for a year or less. And then when they reset, they may face escalating rents.
Len Kiefer 15:14
So that's a, it's a very tough economy, a very tough situation. And given the dire shortage of housing in this country, the pressure remains on rents. You know, when we ask our colleagues at Freddie, they work on the family market, forecast that and looking at rent growth, the prospects for continued rent increase are very strong, right? That that's gonna continue to face pressure. And if you think about that, for many renter households that are, you know, not all, but many of them are lower income, they're facing pressure from rising gas prices and food as well. And so their budgets get squeezed. So it's a, it's a tough situation, and so that's why it's really important that we, you know, can help, you know, facilitate the financing of rental housing to help try to keep those costs, you know, as low as we can.
Mohamed Younis 16:00
Is renting -- let me ask the question differently: You said buying a house isn't for everyone. Is there an argument that buying a house is kind of a thing of the past in America, and future generations will actually looking to be renting more because it gives you more mobility, you can move from town to town if your job's on Zoom. Maybe it makes more sense than to have so many roots. Do you buy any of those arguments at all?
Len Kiefer 16:28
Well, I mean, for any individual, right, the story can be. And, and so for many, like I alluded, many millions of Americans, renting makes a lot more economic sense. But for millions of others, this, there's still a tremendous value to the homeownership proposition. It reflects in your question, when we let off, right, you mentioned that many Americans consider homeownership over the long term to be a very good investment. And there's a lot of truth to that. For most Americans, you know, roughly two-thirds of Americans are homeowners. For many of those, right, housing is their primary source of wealth, and they can build wealth. And research has shown that that that that is effective. A lot of it is through a forced saving mechanism that because you're paying your, you know, fully advertising mortgage month after month, you're making that payment, well, a portion of that is your own savings, right? Because you're building home equity over time. And that mechanism is very effective for, for home for homeowners to build wealth, you know, over the period of the mortgage.
Len Kiefer 17:22
And so there's definitely a value to homeownership. Where the, you know, the balance is, swings for the market or any individual is going to be, you know, very, depend on the economic context. Although, you know, there was, you know, after the global financial crisis in 2008, analysts saw the homeownership rate decline, at that time were saying, well, maybe everyone has soured on homeownership. Maybe the homeownership rate's going to permanently decline. Maybe it'll even fall below 50%. There was a HUD research symposium related to that, and they had many esteemed economists, right, you know, on that prospect. Most of them said, no, probably not that low, but maybe it is going to decline. But since then, we've seen millions of Americans enter into the housing market, become homeowners, and the homeownership rate has recovered and rebounded.
Len Kiefer 18:09
And so I don't know if there's an exact right rate, because again, it depends on the individual situation. But for many, many Americans, I think they still value homeownership, and so making that possible is, is critically important, I think, for the overall sort of sense of health for the broader economy, but not necessary for everyone and at all times, right. Some folks, it may make more sense to rent at different periods of their life -- if they're moving, they're planning to be more mobile. But if they settle down, we definitely see that in our, you know, in the data -- that as millennials age, many of them are starting to have families. That often leads to homeownership where it makes more sense, space, the ability to lock in a fixed payment and build wealth over time for their family. They find that very attractive.
Mohamed Younis 18:51
Yeah, and just to reiterate, even though we might be at a kind of a low moment, in terms of people saying it's a good time to buy a house, first place, with a very, very, very, very distant second is a best thing to do for investment continues to be buy a home in this country. So most people absolutely see buying a home as really the best way to build wealth in America. On that note, Dr. Len Kiefer is deputy chief economist at Freddie Mac. Len, thank you so much for being with us.
Len Kiefer 19:23
Great to be here. Thanks so much. Really enjoyed it. Thanks.
Mohamed Younis 19:32
That's our show. Thank you for tuning in. To subscribe and stay up to date with our latest conversations, just search for "The Gallup Podcast" wherever you podcast. And for more key findings from Gallup News, go to news.gallup.com or follow us on Twitter @Gallupnews. If you have suggestions for the show, email email@example.com. The Gallup Podcast is directed by Curtis Grubb and produced by Justin McCarthy. I'm Mohamed Younis, and this is Gallup: reporting on the will of the people since the 1930s.