As we look ahead into 2023, it’s important to peek into the past to understand where the industry is today and consider the trends that will continue to play out over the next year. It’s clear, things are very different than they were a year ago. At the start of 2022, there was a continued feeling of getting “back to normal” as people became more comfortable with what the new normal would be. For the mortgage industry, the tide was beginning to turn after an extended run of hyperactivity. Little did anyone know the headwinds were only going to become more severe as the year continued.

It didn’t take long to realize 2022 was going to be a year of change and reversal.

Economic Factors

As we entered 2022, signs indicated previous fiscal policies, which had helped families and the economy get through pandemic impacts, were about to change. These strategies, while needed at the time, had also contributed to an “overheating” economy, resulting in rapid inflation. In an attempt to combat the concerns, in March the Federal Reserve made its first in a series of fed funds rate hikes – from near zero to above 4% by year-end. While the fed funds rate does not directly impact mortgage rates (which are more closely tied to the 10-year Treasury yield), they do typically trend in a similar direction.

The Fed also significantly impacted mortgage rates and the industry by:

• Curbing asset purchases in the bond market

• Reducing its balance sheet size

After years of buying bonds and mortgage-backed securities, the Fed significantly reduced its involvement. By removing itself as a major buyer during a time of slowing mortgage activity, rates were driven even higher.

Interest Rates

We started 2022 with 30-year fixed rate mortgages in the low 3% range – up slightly from historic lows. Due to economic factors, by mid-year, rates had risen at a historic pace, and by late fall, such rates reached the 7% range – the highest level in more than 20 years (though still considered low when looking at extended history). This was a year of extreme volatility for the mortgage industry.

Now, the major question is whether we’re heading into a recession. While opinions vary, many believe it will happen – the only unknowns are how severe and for how long. Typically, when there is a recession, mortgage rates drop.

Many economists say mortgage rates either peaked in late 2022 or will peak in early 2023, and then moderately decrease throughout the year into 2024. Does that mean we’re returning to the historically low ranges we experienced over the past couple years? While no one believes that is going to happen, many expect to see rates for 30-year fixed rate mortgages in the high 5% range, continuing to trend lower throughout the year. As affordability has become a major challenge for many dreaming of homeownership, a rate decrease would be a welcome trend.

Housing Inventory and Values

There has been tremendous housing appreciation over the past few years, with percentage increases in the double digits. Combined with inflation, eroding consumer confidence and higher mortgage rates, appreciation levels have finally started to slow. We still expect most of the country to have ended 2022 with year-over-year increases of more than 10%, but that is far less than the past two years. Some markets that experienced the most significant, rapid increases are starting to see home values decrease. Nationally, some level of home value depreciation is expected in 2023, ranging from smaller declines of 5% in much of the country to drops of 20% or more in markets with the greatest increases.

One of the most important factors in determining appreciation is the number of homes available for sale. While housing inventory has slightly improved in most markets, we are not yet at a healthy, balanced level. This trend is expected to continue, but history shows it often takes years – not months – to catch up. Appreciation has most impacted lower-priced homes, creating significant challenges for people with lower income and first-time homebuyers – an important segment of the housing market. Since home values and other changes are typically driven by local factors, we will likely see appreciation differences across the country.

Affordability has become an even larger challenge – for both monthly and down payments. While many still wrongly believe it takes 20% down to buy a home, there’s been an increased industry commitment to making sure potential homeowners understand all available options. The industry is also developing more programs to help homeowners overcome affordability challenges.

The industry is seeing some loosening of acceptable credit standards (partly due to relaxing restrictions set early in the pandemic), but it’s nowhere near the types of nuanced programs that led to the Great Recession of 2007-2009. Today we see credit requirements that support a healthy financing environment, and over time we will likely see some “tweaks” to overcome some challenges.

Moving Forward

After experiencing a variety of headwinds in 2022 and the reality of some continuing into this year, the mortgage and real estate industries do see positive opportunities in 2023, partly due to:

• Expectations of rates beginning to decrease from the highest levels in two decades

• Consumer confidence in real estate becoming more positive as the industry becomes more balanced

• The slowing pace of housing appreciation

• Increasing inventory levels

• Program tweaks to make homeownership possible for more people

Using good, old-fashioned professionalism, competitiveness and customer service, we expect great things for Bell, our business partners and our clients in 2023. If you’re thinking about building or buying a new home, vacation home or investment property – or evaluating your current mortgage – we’d love the opportunity to help you determine what’s in your best interests. As always, we welcome your business and referrals and would be honored to serve you.

Tony Weick
EVP/Bell Bank Mortgage President