Featuring the perspectives of:
Howard Ackerman, Vice President and Mortgage Production Manager, Regions Bank
Jeremy Collett, Executive Director of Capital Markets, Guaranteed Rate
Ryan Doehrmann, Chief Mortgage Officer, GreenState Credit Union
Matt Horney, Executive Director, Senior Lending Manager for Illinois and Wisconsin, JPMorgan Chase & Co.
Esther Phillips, Senior Vice President, Director of Sales, Key Mortgage Services
Ayoub Rabah, President, Coldwell Banker Realty, Central West Region
Tim Tuz, Senior Vice President – Capital Markets, Wintrust
Will interest rates continue to rise next year, and what impact will rates have on the market?
Phillips: This will undoubtedly be incumbent upon the economy’s reaction to the most recent Fed tightening — if the raising of the Fed funds rate in 2022 was sufficient enough to tame inflation and lead it downward, then we have most likely seen the top of the interest rate range. If the economy continues to plow ahead — causing inflation to stay at 8% or higher — the Fed will have to continue to be aggressive in its monetary policy, and in doing so could cause interest rates to go higher. What we don’t know is what other global factors may weigh in on this, such as continuously weakening global economies, further conflicts such as Ukraine, or any other unforeseen global challenges. The Mortgage Banker Association, Freddie Mac and NAR all predict that rates will stay around the current levels through the third quarter of 2023 and then retreat in the fourth quarter. To be fair, none of these entities had their 2022 rate predictions accurate, so take the estimates for what they are — just estimates.
As for the impact on the market, the elevated rates have had both a psychological as well as financial impact on buyers, with a heavier emphasis on the psychological factor. Potential buyers have sticker shock due to higher monthly payments without a corresponding decrease in home prices. I believe a more prevalent hindrance to the market is the lack of inventory. If rates retreat in 2023, it may be a help to buyers, but also hopefully to sellers — encouraging them to give up the lower rate on their existing mortgage and make the move to their next home.
Horney: A major concern for buyers currently is rising interest rates. There isn’t an exact science to timing the market, and while interest rates have skyrocketed in recent months, it’s always possible that interest rates could fall.
At Chase, we offer something called the Homebuyer Advantage, where buyers work with a home lending advisor to find out how much home they can afford and go through some or all of the underwriting process while shopping for a home. That way, buyers can make an offer on their dream home with confidence and can focus on their move instead of the mortgage after finding a home. Once buyers find the right home, we advise they lock in their rate shortly thereafter. Mortgage rates fluctuate every day and, as we have seen so far this year, can move higher quickly. If buyers find a house they love and are comfortable with the payment on the home based on today’s rates, we suggest locking in that rate so they have certainty of what payments will look like on the home loan.
Collett: We can make educated guesses, but rates are hard to predict. The Fed just raised their federal funds rate to 3.75%-4% on November 2, indicating that more rate hikes are coming. We think that this cycle of aggressive rate hikes is coming to an end soon, dependent on inflation coming down. We could see the Fed raising rates by 0.5% at their December meeting, then 0.25% in 2023, until their rate sits at 4.75%-5%. If that happens, mortgage rates could fall.
What buyers should remember is that they can “marry the home, date the rate.” In other words, find a home they love and be prepared to refinance when mortgage rates come down.
Ackerman: I can’t predict what rates will do, but many people — including our Chief Economist Richard Moody in reports like his Sept. 21, 2022, Economic Update —believe that rates will continue to rise through 2023. If that is true, when combined with slowing economic growth, inflation and housing supply shortages, the mortgage lending environment will continue to be challenging.
Doehrmann: We’ve seen rates at 7%-plus have a negative impact on the market; it has created a market freeze with both homebuyers and sellers staying on the sidelines. I think we’ll see rates in the 7% range at least into the first quarter and maybe even into the second quarter. Everything hinges on inflation and the Fed’s decisions.
Tuz: My expectation, based on economic indicators: that interest rates will likely reach their peak sometime in early spring 2023 and start to plateau or even trend slowly down as the market cools off and inflation finally starts to trend downward. Higher rates will continue to put pressure on affordability of new purchases and on housing values.
Rabah: Chicago, Milwaukee and the Midwest generally hold up well due to affordability as opposed to other parts of the nation, but if we wanted to zoom in, areas right outside of the Loop will remain extremely hot — think Lincoln Park, but going further to Avondale. However, now is also a great time to invest in the city while we are experiencing a bit more supply. Suburbs will continue to remain desirable, as many have low inventory, and you will always have that pipeline of buyers that are making the city-to-suburb move.
What should homebuyers be watching for regarding mortgages?
Horney: There are several factors to consider when evaluating your mortgage options, including the loan term, the interest rate type and the loan type. Potential homebuyers should focus on researching and identifying these factors to help narrow down their options.
For example, there are two basic types of mortgage interest rates: fixed and adjustable. While adjustable rates are low initially, they can change over the course of a loan, so your mortgage payments may fluctuate. On the other hand, fixed rates will stay the same and the mortgage payments won’t change over the life of the loan.
Other considerations to keep in mind that could add on to your monthly payments are property taxes, homeowner’s insurance and possibly HOA fees, depending on the property type.
For mortgage term, homebuyers tend to opt for a 15-year or 30-year mortgage, though other terms may be available. The term length indicates how long you have to pay off the loan. On a 30-year mortgage, you’ll generally have a lower monthly payment compared to a 15-year mortgage, but you’ll pay more in interest over the life of the loan.
Not all mortgage products are created equal. Some have more-stringent guidelines than others. Some lenders might require a 20% down payment, while others require as little as 3% of the home’s purchase price. Choosing the loan that’s best for your situation relies primarily on your financial health: your income, credit history and score, employment and financial goals. A home lending advisor can help analyze your finances to help determine the best loan products. As an example, Federal Housing Administration (FHA) loans require only 3.5% down payment, while the U.S. Department of Veterans Affairs (VA) loans may not require any money down.
Tuz: Homebuyers should be leveraging programs that offer lower interest rates and lower monthly payments for a period of time such as temporary buydown programs and adjustable rate mortgages, as the higher interest rate environment is widely expected to be temporary and borrowers would be able to take advantage or refinancing into lower fixed rates in a few years. In addition, LIBOR is scheduled to officially be retired in June of 2023, so any borrowers that currently have an adjustable rate mortgage tied to LIBOR will likely see their mortgage index changed to SOFR, which typically trends a bit lower then LIBOR and is a backwards-looking instead of future-looking interest rate.
Doehrmann: I think they need to be focused on the Fed, inflation, and the possible recession. That will dictate where interest rates are headed. If we can get rates back into the 5-6%, we’ll start to see movement in the housing market. They also need to find lenders that can offer them multiple options and who will sit down with them and be their trusted advisor. The days of quick transactions and locking in the lowest rate possible as quickly as possible are over for a while. Homeowners need a lender who can advise them on the best solution for their particular situation.
Ackerman: As rates rise, homebuyers should have opportunities to purchase homesat more competitive prices compared against the past two years. They have the ability to choose from many loan programs including fixed, adjustable rate and rate buydown programs, which will make homeownership more affordable for many, even amid higher rates. Regions offers several affordable mortgage options, including those allowing low-to-moderate income borrowers to borrow up to 100% of the cost of the home. Even with the current rate environment, there are still many benefits of becoming a homeowner in 2023. Why do I say that? For one, I believe property values will continue to increase — even if at a slower rate than during the previous two years. Regardless of the rate cycle and economy we’re in, equity growth remains a great way to build wealth. And that comes through owning rather than renting. The sooner you own your home (assuming you can afford it and property values are increasing), the sooner you will benefit from this core financial strategy and the many benefits it produces to strengthen families and communities.
Collett: First-time homebuyers and communities that have traditionally suffered with affordability issues should keep a close eye on recent enhancements made by Fannie Mae and Freddie Mac. The current administration and Federal Housing Finance Agency (Fannie and Freddie’s regulator) have been laser-focused on opening up affordability and creating products that allow for further home ownership opportunities for this segment of the market.
Just this week, they announced that four groups will see their upfront loan fees — also called guarantee fees or “G-fees” — eliminated when using conventional loans backed by Fannie Mae or Freddie Mac. These groups include low- to median-income first-time homebuyers, buyers using the HomeReady or Home Possible loan programs, buyers using the HFA Advantage or HFA Preferred loans and single-family loans that fall under the Duty to Serve program.
Phillips: I believe homebuyers should engage with a professional loan officer who is there to help educate, consult and advise what may be the right loan program for their individual situation. Reading online about ARMS, paying points or doing a temporary rate buydown all sound great and may be a good option, but there are pros and cons to each of these financing options. Consulting with a professional can help illustrate the full picture and allow the homebuyer to make an educated decision that’s right for them. Lately there has been a noticeable incentive through various housing agencies (FHFA and HUD for example) to assist low- to moderate-income homebuyers obtain financing. Connecting with a local loan officer will help a potential homebuyer stay abreast of any changes that could be advantageous to them in potential communities they are considering buying in.
What will be the biggest challenges and opportunities for lenders in 2023?
Doehrmann: Obviously, it all starts with interest rates and housing inventory the next year or two. We all know you can’t rely on refis, and those lenders that have great purchase referral sources, a solid business plan and work for a company with great resources will survive in this market. I think we’ll see some consolidation in the mortgage business that could present some recruiting opportunities for companies. It’s also a great time to refresh your skills and knowledge — we’ve gone so fast for so long that many have neglected this area. Improve your skills and be ready for when rates come back down!
Tuz:The largest opportunities for lenders in 2023 would be to capitalize on market consolidation and potential for picking up market share via programs such as Home Equity Lines of Credit (HELOC), or programs that assist first-time homebuyers though HFAs or State Bond Housing Authorities.
Ackerman: Certainly rates will continue to be a major headwind for our industry. They’re currently the highest they have been since before the Great Recession — above 7% and more than double what they were a year ago — and demand for mortgages is consequently the lowest we’ve seen in 25 years. At the same time, housing supply is still low, meaning we have a way to go before supply and demand are more in balance. Add in higher prices for everything from food to gas to clothing to building materials, and it’s not surprising that consumers are concerned about the economy, inflation and their finances. But this is also a time where mortgage companies can really make a difference for customers, deepen relationships and grow business. Whether it’s moving from a comparatively more expensive to a comparatively less expensive area because of work-at-home trends or relocating from one city to another or one state to another to reap the benefits of a lower cost of living, there will always be those who need home financing. But there’s another opportunity: to listen and provide the trusted guidance and advice people want. Whether a home purchase is a short- or long-term goal, we have the experienced mortgage bankers, the personalized Regions Greenprint℠ financial planning process, Regions Next Step® no-cost financial wellness insights and other tools and resources to help people and families fare better today as they plan for their financial future.
Collett: There are several hurdles lenders will face in 2023, many of which carry over from 2022. The fluctuating rate environment continues to be a challenge for everyone, and I expect that will continue into 2023.
In addition to interest rate volatility and uncertainty around how the Fed will fight 40-year highs in inflation, lenders will still have to contend with profitability and cost control in this new, low-volume environment. We believe 2023 will be a year of consolidation for lenders, so expect a large uptick in mergers and acquisitions among lenders.
Liquidity remains an issue. The secondary market for the most part has been decimated by the enormous spike in interest rates. Falling deposit rates, lower asset prices and snail-paced runoff rates have created a major liquidity crunch that doesn’t appear to be going away anytime soon.
Different types of loan products, like ARMs and temporary buydowns, can help buyers ease into homeownership and take advantage of lower or more stable home prices without a long-term rate commitment. When rates come down, opportunities exist to lock in for the long term.
Horney: It may feel like the housing market is incredibly volatile right now, but you don’t have to go through it alone.
Getting connected early with a qualified lending professional will help ensure you’re prepared for the homebuying process. Beyond professionals, tap into your personal network and find emotional support and knowledge from those who have already gone through the homebuying process. Push yourself to ask questions, and remain steadfast in your goals.
Phillips: The biggest challenge for lenders in 2023 is going to be balancing providing the technology, systems and support that professional loan officers, their corresponding referral partners and clients need with the continued compressed margins and an infrastructure built to handle the exceptionally high mortgage volume we experienced in 2020 through the first quarter of 2022. The companies that can invest in their business will garner outsized gains in 2023 and beyond. Investments not just in tools and marketing, but investments in sales coaching and education, business planning and development will all pay dividends in retaining and attracting talent.