The mortgage industry, like the rest of the economy, faces uncertainty in 2023.
Every new year, and particularly this year, is a time to reflect and focus on the challenges and opportunities ahead.
In 2022, the Federal Reserve raised interest rates seven times – the most in the last 40 years. The Fed has been very clear it will continue its aggressive monetary tightening policy until core inflation nears its 2 percent target rate and the labor market loosens.
The housing market continues to be impacted, with home and rent prices up since the Great Recession and, most significantly, over the last few years during the COVID pandemic. Combined with a national housing shortage, the dream of homeownership is now more difficult for many Americans. Those lucky enough to find a home to bid on may have a hard time qualifying for a mortgage given combined high real estate prices and higher interest rates.
As we move into 2023, we are still left with pandemic aftereffects – and with many opinions as to what comes next.
We are expecting headwinds from rising interest rates, thus slowing general loan demand. Customers will likely continue to see the effects of inflation and persistent supply chain abnormalities, and we expect fears to remain of an overall economic recession.
Residential real estate values appear to have peaked, and many markets are now experiencing a correction in values. While it could spell relief for buyers, some who purchased a home recently at the top of the market with little money down may find themselves with a mortgage balance higher than its current value.
Behind us are the days of bidding six figures over asking price, waiving home inspections and other concessions on residential purchases.
Since many homeowners were able to purchase or refinance when interest rates were at their all-time lows, home equity lines of credit or second mortgages are now popular loan options to tap into home equity. Pricing on these products has also been impacted, with prime rate now at 7.5 percent compared to 3.25 percent in early 2022. But these products remain a much cheaper alternative to credit cards for anyone looking to fund home improvements, finance tuition costs or pay for other needs.
Commercial real estate activity is generally more stable and consistent than residential during most economic downturns; however, values are also being impacted by increasing cap rates. Commercial loans underwritten at 3 percent to 4 percent interest rates may not be able to service debt requirements at 6 percent to 7 percent interest rates at the adjustment period – or when those notes balloon.
Tony Rakic
Customers will usually find that community banks are more service-oriented by being attentive and responsive to consumer requests compared to larger, more bureaucratic, publicly traded financial institutions. Customers want a relationship with a banker who understands their business or personal situation and can help meet their needs by reacting quickly to any requests or concerns.
While times appear uncertain into the new year, challenges tend to create opportunities. The Fed is expected to pause rate hikes in the spring and analyze its impact throughout 2023. If the economic data calls for the Feds to then cut rates at the end of 2023 or early in 2024, it will stimulate commercial and consumer activity by reducing borrowing costs. The stock market will react positively with recovery in most asset classes and, eventually, the overall economy, boosting business and consumer confidence with a more positive and opportunist outlook.
Tony Rakic is executive vice president and chief lending officer at Leominster-based Rollstone Bank & Trust.
