How interest rates, home values & inflation will shape 2023 reverse mortgage production
After a turbulent final quarter of 2022, it’s natural to ask what can we expect in 2023. The honest answer would be ‘anything’. However, there are three trends reverse mortgage lending professionals will want to watch in the new year- interest rates, home values, and inflation.
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The central bank’s efforts to stem problematic and persistent inflation resulted in a series of historic interest rate hikes. Those rate increases have stalled the U.S. housing market pushing it into what many experts are now calling a ‘housing recession’. Not surprising considering the Federal Reserve’s rate hikes resulted in 30-year fixed-rate mortgage rates more than doubling from roughly three percent to around 7 percent this year. The more important question for mortgage pros is where the 10-year Constant Maturity Treasury rate is likely to move next year. The global business intelligence agency KPMG Economics expects the 10-year treasury note to peak around four percent in the second quarter of 2023 and fall to approximately 3.3% by the end of next year. This rate is key as it’s the index used to establish the HECM or federally-insured reverse mortgage’s expected rate which in turn determines how much a borrower may qualify for. The 10-year CMT index whipsawed from a high of 4.25% in late October to 3.5% last Tuesday. More concerning, however, are 2023 lender margins which hinge heavily on secondary market demand and expected profitability. New View Advisors partner Michael McCully’s recent comments to Reverse Mortgage Daily may reveal a silver lining as lender consolidation should relieve some of the earnings pressure HMBS issuers are facing. The next indicator to watch is home prices. After months of cheering on a deteriorating housing market, more experts are acknowledging the housing market shift- many calling it a housing recession. KMPG’s December edition of its Economic Compass forecasts the S&P Core Logic Case-Shiller home price index to drop 20% from the fourth quarter of 2023 when compared to Q4 2022. Some metros have already exceeded that forecast in month-to-month home sales price declines. Previously red-hot markets like Boise Idaho, Austin Texas, and Phoenix Arizona have proven the most vulnerable to price declines. In Austin, nearly two-thirds of home sales listings have undergone a price reduction and other markets are seeing similar trends. The Fed’s rate hikes coupled with bloated home prices have pushed housing affordability to its lowest level since the mid-1980s KPMG reports. Those pressures may push home prices closer to their pre-pandemic levels and rebalance the market. One encouraging finding in KPMG’s report is that a stunning 40% of homeowners have paid off their mortgages. This speaks to the untapped market potential of reverse mortgages that remains today. Then comes the lynchpin- inflation. The Fed’s interest rate hikes will continue until inflation can be pushed down to the central bank’s target of 2%. To accomplish this the Fed must carefully push the economy into a recession, ideally a shallow recession. KPMG expects the unwinding of supply chain problems, falling commodity prices, and falling home values and rents to slow the personal consumption expenditures index, or PCE faster than the Fed’s forecasts. If that comes to pass KPMG expects the Fed to pivot to aggressive rate cuts in late 2023. This would in turn lower the HECM’s expected interest rate increasing available funds for new borrowers. What factors do you suggest reverse mortgage professionals watch in 2023? Share your insights in the comment section below or leave a comment on YouTube. Sources cited:
A Wonderful World? 2023 Outlook
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