Predictions, Decisions and Getting it Wrong

It’s 2008. The economy is taking a nosedive. The government is bailing out the country’s top mortgage lenders. And Doug Duncan walks into a new job at Fannie Mae. The ship has steadied over the past 15 years and Duncan, the senior vice president and chief economist, has kept his core values intact: good communication, a commitment to the truth, and a willingness to make decisions. On this episode of the Voices of Experience podcast, Duncan relays how he makes predictions (knowing full well he could get it wrong), his best advice for clear communication and the “big breaks” that put him where he is today.

Show Notes

Doug Duncan is the senior vice president and chief economist at Fannie Mae. He visited the University of Denver to speak at the Burns Leadership Series, an event hosted by the Burns School of Real Estate and Construction Management at the Daniels College of Business.

1:04 From dairy farm to chief economist
2:55 Joining Fannie Mae in 2008
6:24 Getting to “The Truth”
9:48 Making predictions and getting it wrong
Most important lesson in leadership
12:29 What to expect from the housing market
16:09 “Big breaks” in Doug’s career
19:13 The importance of communication
21:02 Show notes and credits

In this episode:

Doug Duncan’s professional biography
Franklin L. Burns School of Real Estate and Construction Management
More about the Burns Leadership Series
Investopedia: Fannie Mae: What It Does and How It Operates
Wall Street Journal: Mark W. Olson Rose From Small-Town Bank to Seat on the Federal Reserve Board

History: Here’s What Caused the Great Recession

Transcript

Lorne Fultonberg:
Today, on the Voices of Experience podcast.

Doug Duncan:
You don’t know with certainty anything out ahead of you, but you still have to make decisions.

Lorne Fultonberg:
Looking at the data, making a prediction and realizing you could very well get it wrong.

Doug Duncan:
People expect a point estimate in a forecast, and the best thing you can really do is give them a range of potential outcomes.

Lorne Fultonberg:
As the chief economist at Fannie Mae, Doug Duncan is kind of like the weatherman of the housing market. His analyses and forecasts set the tone for a significant sector of the economy, and are used by investors and consumers across the country. On this episode, we talk about what it takes to get to the truth of complex issues and how to communicate it at a time when “truth” seems kind of subjective. We also talk about what it was like to start his job at Fannie Mae in 2008—one of the darkest times in the company’s 90-year history—and what we can expect from the housing market in the year ahead.

Lorne Fultonberg:
Doug, thank you so much for stopping by.

Doug Duncan:
Yeah, thanks for inviting me. Glad to be here.

Lorne Fultonberg:
I read that you grew up on a dairy farm in Fergus Falls, Minnesota.

Doug Duncan:
That is true. I tell people the operative word on being from a dairy farm is the word from. Milking cows is twice a day every day the rest of your life. That was not going to be my future.

Lorne Fultonberg:
You figured that out pretty early on?

Doug Duncan:
I did. And I liked the field work. In fact, if ours had been a grain farm, I’d have probably stayed in farming because I really enjoyed the outdoors work and all of that. But milking cows was not my thing.

Lorne Fultonberg:
You started your career in agriculture though, right? Not doing the work with your hands, but agricultural industry.

Doug Duncan:
Yeah. I was interested in the finance side of things. So my dad would go to buy a piece of machinery. I would go along with him to the machinery dealer and listen to the conversation between him and the implement dealer and understand how the financing helped him fit things into the cost structure of his operation and how the implement dealer would work with the financial institution who provided the lines of credit or the loans for the execution of that. That all was interesting to me, and because I knew agricultural problems related to finance, it made sense to get an agricultural economics degree. In fact, all three of my degrees are in agricultural economics. But it’s just the application of economic principles to agriculture.

Lorne Fultonberg:
So it’s a natural transition to what you’re doing now?

Doug Duncan:
What you learn when you go through economics training is a toolbox. You accumulate this toolbox of things that you can use, and they should be applicable to any subject area. You choose different ones depending on what the nature of the subject area that you’re looking at.

Lorne Fultonberg:
Let’s talk about the beginning of your time at Fannie Mae, where you started in 2008, right? which is a year that maybe sets off some alarm bells for people who are familiar with economic history. Housing market took a nosedive, government bailed out Fannie Mae and Freddie Mac, and you showed up. And how did you navigate that crisis both professionally and personally?

Doug Duncan:
Well, it was obviously a unique time period, so there were lots of things happening where there were no real precedents for understanding, and when you’re trained as an economist, you’re trained in analysis. And so there were lots of things to think about. And so the question was how do we unwrap what happened and how do we understand the relationship to the policy responses that are developing or did develop during that time period? So I made the move. Some of my staff from where I was leaving at the mortgage bankers, they showed the Fannie Mae stock price and then they put an arrow on there and then when it turned down, this is when Doug announced he was going to Fannie. So you can see the kind of people that I hire.

They’re typically a lot of fun. But that was the first thing that I did when I got to Fannie Mae, was to go about finding people that really wanted to dig into things and understand fundamentals of what went wrong in the market. So I inherited four people, two of whom were gone within the first two weeks. Now I have a staff of 38, which is pretty unusual for a corporate chief economist, but it’s because I continued hiring those kinds of people who would dig into things and we became an internal consultant across the company. So we would go to different business units and say, “What would you solve if you had more resources? How could we help you solve business problems?” And that’s gotten around the company and we probably have 140 projects underway at the present time. So it was that mindset of what can we do to understand things better, to make better decisions?

Lorne Fultonberg:
Is there a skill or an experience or some sort of memory that you are still applying to your job 15 years later?

Doug Duncan:
Well, when I started my career, I had talked to some economists that I knew that had gone into the business world and I asked them, “What makes you successful in the business world as differentiated from the academic community?” And they said, “Well, a lot of people don’t listen to economists because they think of them as eggheads that can’t make a decision. So we’ve learned how to make decisions.”

So one of the things I observed was the more successful of those people were good communicators. And so I focused intensively on becoming a good communicator with the business community that I was going to face off against. And I wanted to go into the business community primarily because you get quick feedback. If you’re giving bad advice, you’ll find that out very quickly. And it’s different than in academia. You publish a journal article, it may be a pathbreaking piece of research, but it might take three years to get into a publication too, and I’m just not that patient. So it’s a flaw, I guess.

Lorne Fultonberg:
You are navigating this interesting position at Fannie Mae where it’s part government, part private sector, and one of the things that I’m interested in is all of the political changes while you keep your job. I think there have been three presidents, three Fed chairs, a bunch of shifts in Congress of who’s in charge. How do you navigate all of that change and does the person who’s in power influence how you do your job?

Doug Duncan:
The first and most important thing that I stand for is, to the extent that it is humanly possible, get to what is true. Because If you determine what is true once you’ve stated that, you don’t have to try to remember all the other things you might’ve said because it will still be true. And so in each of the positions that I’ve taken as chief economist, it has been one of my principles, and in agreement with management, that our job will be to ferret out the truth, whether it’s advantageous or disadvantageous to the organization.

You’re going to want to know if it’s to your disadvantage because you’ll want to deal with that. So we’ve maintained a high degree of independence in terms of the challenge function that we perform within the company and on issues that relate to the company, getting to the core of what’s really true with regard to a problem. The other reason that I make that or another reason I make that as a standard is it allows me to hire true academic professionals. And so I actually have seven or eight people who work in the academic sphere publishing journal articles and things like that. Very important to adhere to sound principles of scientific research, even in the business community.

Lorne Fultonberg:
Truth is a funny word in the political realm today, as is science. Do you ever have trouble convincing people that the truth that you’ve found is the truth?

Doug Duncan:
Yeah, absolutely. One of the ways that we try to validate what we are proposing as true is to reveal all of the background analysis that we do. So for example, we do a survey every month of a thousand households using the federal statistics to get the weighted population to be representative of the United States, all the statistical properties so that the results can be generalizable for use in policy. And we state that right up front on the website.

You can look at this and see, these are the things that we apply. And if you disagree with them, but we would love to hear about it first, and second, then you can respond to what we say with whatever alternative view there is. And we understand it is very difficult to get to what is true. So just because we reach an initial result on something, doesn’t mean we stop looking at it. Because more data keeps coming in, maybe different data comes in, and when you look at the new combination of data, you might reach a different position. And we certainly don’t suggest we don’t make mistakes. Mistakes are something that all humans make. We’re human and we make them as well. But an error of intent to mislead, that is not part of our approach.

Lorne Fultonberg:
That actually leads to something that I wanted to ask you about, and you are in the business of predictions and forecasting. I used to work in TV news alongside a lot of meteorologists who were also doing forecasting. So sometimes you are bound to be wrong and sometimes in big ways. How do you steel yourself against the possibility that you could mess up?

Doug Duncan:
When I was first brought into an office and offered a position of chief economist, I asked for a week to think about it. One of the reasons was I was going to have to get used to being publicly wrong. Because people expect a point estimate in a forecast, and the best thing you can really do is give them a range of potential outcomes. I’m wrong publicly, my forecast is published every month people will ask, what’s your real forecast? I said, “It’s the one you can read. If that wasn’t my real forecast, it wouldn’t be there.” But then we’ll say, “Okay, this is our baseline what we’re thinking, but here’s the risks to that baseline. If we’re wrong, it’s more likely in this direction because of the following reasons.”

Lorne Fultonberg:
You’re here on campus this week as part of the Burns Leadership series, which is a wonderful program through our school of real estate and construction management. And you’ll be talking about a lot of things that are industry specific. I’m curious what the most important lesson in leadership that you’ve learned over the course of your career has been.

Doug Duncan:
People will achieve more than you think they will achieve if you give them a challenging environment, one where they can see the impact of their work, make sure that you’re providing them with direct feedback on how they’re doing, and ensuring that they have the resources required to carry out the things that you have asked them to accomplish. But you also have to give them room to recognize that you don’t know everything either, and provide a feedback network where they can let you know if they’re seeing things that aren’t working right that you might not perceive.

The best outcome for me is if the other people around the company look and say, “We’re not so sure about Duncan, but he’s got a lot of really good people working for him, so something must be going right.” And for the staff, I make them a promise that if they choose to exercise it, they can establish a personal platform for excellence in the subject matter that they’re in charge of being responsible for.

Lorne Fultonberg:
I am not going to try to pretend to be even close to an expert on housing or lending or mortgages here, but is there a trend that we should keep our eyes on here in 2024?

Doug Duncan:
Well, first of all, my mother says that that word expert is actually two words. An ex is a has been, and a spurt is a drip under pressure. So I never accept the title of an expert. So I know a little bit. I’ve accumulated a little bit of information on housing. So I’m sorry, your question is the direction-

Lorne Fultonberg:
Just something we should keep an eye out for? What can we expect, broadly speaking, in 2024?

Doug Duncan:
Our view is that the growth in the residential real estate space will start to pick up in the second half of 2024. What I’m saying to folks in the industry or consumers is: We did four years’ worth of business in two years. The decline in interest rates through the combination of monetary policy and interest rates plus the Fed’s purchase of mortgage backed securities led to historically and lifetime lows in mortgage rates between the middle of 2020 and the middle of 2022. So there’s this massive growth in mortgage lending in those two time periods, which was essentially bringing forward business from the second half of 2022 through the first half of 2024. So that’s why you hear all the pain at the moment in the housing sector from people who are lenders or realtors or that kind of thing, it’s because of that shift of business forward in time, leading to a very low level of activity today.

Lorne Fultonberg:
So for millennials like me, I’m not ashamed of it, many of my friends are starting to buy their first homes or starting to upsize from something like a condo to a house. What does this all mean for them?

Doug Duncan:
Well, there’s a challenge for them. The challenge is that the boomers are doing what they said they were going to do, which is they’ve said all along, “we intend to age in place.” And they are, they’re not going anywhere. And during the pandemic, they learned that if they know how to operate an iPad, they can actually get health care at home, which will keep them in their house longer. So technologic change in the medical field is going to enable them to even lengthen. The group of Gen Xers who have not gotten any airtime, so I’m giving them a little airtime now, they’re the ones that have locked in two-and-a-half to 4% mortgages.

All those things put this Gen X population, by and large, into a place where they’re not going to go anywhere. So that’s locking down existing home supply as well. So what that leads for the millennials is a very low supply of existing homes, which is typically where first-time buyers go is to an existing home, which they then put some sweat equity in to improve it, and then, when the time comes, they take that equity accumulation and buy a move-up house. Well, since the number of existing homes on the market is historically low, that leaves the burden on new homes, which is typically not the province of first-time buyers, but you can see this in the data by looking at a couple of data points.

One is the share of total homes sold, which are new homes, is very high, relative to history. And the share of new homes who are being bought by first time home buyers is very high with respect to history. So you can see this shift of the supply and what it’s driving households who would like to get into the market to do in the marketplace.

Lorne Fultonberg:
Is there one pivotal part of your career journey that you can pinpoint as being super influential or a quote unquote “big break” for you?

Doug Duncan:
Wow. Let me answer that in two ways. The direct answer is yes, but there are two instances. One of them is something that I talk to students about, which is do mentors matter? And I have across my career, had three or four people who for reasons unknown to me, decided to take me under their wing and teach me something. One of them, when I had first started at the Mortgage Bankers Association, a man named Leo Knight who has since passed away, as the head of a mortgage company up in it was either Michigan or Ohio, I can’t remember. He called me and he said, “Doug, I understand you’re a new employee at the mortgage bankers. You’re an economist. I have a board meeting at five o’clock. I have to make a decision on this issue. Could I ask you to look into this? And call me back this afternoon and tell me what you think is the right thing I should think about.”

So I called him back and I said, “Well, I looked at this set of data related to the problem and the data’s squirrely, and it sort of indicated this. I looked at this data, it was also had problems.” He stopped me and he said, “Doug, the data won’t be better at five o’clock.” He said, “I have to make a decision at five o’clock. I’m just asking you for your best advice.” That was a really foundational piece of information, and it tied it back to my experience in the Navy. I spent four years in the Navy. I would stand watch in the captain’s space keeping log, and just because there was fog in front of the ship, you did not stop the ship. You drove the ship through the fog, and that’s very much what Leo was saying driving his business was, you don’t know with certainty anything out ahead of you, but you still have to make decisions. That was the eggheads don’t make a decision, right? That was that speech. So Leo taught me that.

When I became Chief Economist, there was a man named Felix Beck who had been the CEO of a company called Margarette, which in its time was the premier independent mortgage banking company. When I became Chief Economist, I get this call from Felix, “Doug, your forecast is all wrong.” And I’m terrified. Here’s this icon of the industry and he’s telling me… Well, as it turns out, after a couple of quarters of that, what I realized was he was going to try to help me understand how to communicate with all the other people in that business in a way that allowed what I said to become part of their decision-making process. And it did. It cemented us as part of the budgeting process for the companies in the industry because of the things that we could produce in terms of information. Hugely valuable.

Lorne Fultonberg:
Last question for you, which we ask all of our guests is as a voice of experience on the Voices of Experience podcast, is there something else that you’d want to pass along to our listeners?

Doug Duncan:
For anyone, but particularly for students who are starting early in a career, you can’t underestimate the payback that you’ll get from good communication skills. So we invest a lot in the communication skills of our staff, but because the thing that has gotten us from four staff positions to 38 is our ability to influence decision makers in the company. And it requires good analysis. So you have to have a good set of facts, but you also have to be able to communicate those things very well in written and spoken communications avenues.

Lorne Fultonberg:
Give me one communication tip.

Doug Duncan:
First thing is if you are asked to speak on something, speak. Get up and do it. You can’t get better if you don’t get up and do it. Second thing is make sure that you’re speaking in the language that the audience to whom you’re speaking receives information. So I could get up to a bunch of mortgage bankers and talk about marginal value product, and they would all leave the room. But if I get up and tell them the cost of doing one more mortgage actually doesn’t increase your net income by as much as you think. Now I’ve got their attention. It’s the same concept, but it’s just in the language. That’s the way that they manage their company.

Lorne Fultonberg:
Doug Duncan is the Chief Economist and senior vice president at Fannie Mae. Doug, thank you so much for giving us some of your time.

Doug Duncan:
Thanks for inviting me. It’s been a pleasure.

Lorne Fultonberg:
Doug’s hometown, Fergus Falls, Minnesota, is only home to about 14,000 people. And yet, it produced two nationally prominent financial professionals. Doug is one, obviously, but there’s also Mark Olson, who at one time sat on the Federal Reserve Board. You can read more about his rise from a small-town bank on our show notes. That’s at daniels.du.edu/voe-podcast. And if you need a refresher on 2008’s subprime mortgage crisis, we have a great explainer linked too.

The VOE podcast is an extension of Voices of Experience, the signature speaker series at the Daniels College of Business, sponsored by U.S. Bank.

Patrick Orr and Sophia Holt are our sound engineers. Joshua Muetzel wrote our theme. I’m Lorne Fultonberg. We’ll see you next time.

Show Notes

Table of Contents

In this episode:

Related articles and information:

History: Here’s What Caused the Great Recession

Transcript

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DANIELS COLLEGE OF BUSINESS AT UNIVERSITY OF DENVER