The U.S. housing market, larger than the U.S. stock market, is facing new pressure as the Federal Reserve raises interest rates to curb inflation.
In 2022, an estimated approximately $100 billion in outstanding mortgage debt will be reached, as per the Mortgage Bankers Association (MBA).
The Fed has raised interest rates 11 times from February 2022 to October 2023 to curb inflation caused by pent-up demand due to the pandemic and supply chain disruptions after the start of the Ukraine-Russia conflict.
This directly led to a slowdown in the mortgage market and a significant drop in new mortgage applications.
If the Fed does not raise interest rates, the MBA predicts that total mortgage lending would decline 26% from $2.2 trillion in 2022 to $1.6 trillion in 2023, before improving 19% to $1.9 trillion in 2024.
Key trends expected to shape the mortgage sector from the end of 2023 to 2024 include:
1. Interest rates are expected to remain high until the second quarter of 2024.
The Fed has raised interest rates by 5 percentage points or more 11 times in the past 16 months, pushing interest rates to a 22-year high in the range of 5.25% to 5.50%. This means the economy is showing signs of a general slowdown, with bond yields rising to 3.40%.
2. It is expected that housing sales will remain sluggish.
The U.S. mortgage sector derives its revenue primarily from home sales, which are important indicators of economic health. A rising interest rate environment has significantly increased the cost of building units, limiting new supply. Housing investment may continue to decline as the housing market has not yet found a new low equilibrium.
3. GDP growth is expected to remain unstable.
GDP growth was surprisingly stronger in the third quarter of 2023 than in the second quarter of 2023, driven by increases in consumer spending, government spending, and nonresidential capital investment.
4. Third parties continue to optimize and streamline other parts of the mortgage process. The market share of non-bank lenders continues to grow, driven by a small number of players primarily focused on digital.
5. Strategies lenders are pursuing to overcome current challenges include increasing lending rates for retail customers and focusing more on introducing new technologies to reduce costs.
Click on the following links for more information:
-
https://www.newyorkfed.org/medialibrary/interactives/householdcredit/data/pdf/HHDC
-
https://www.attomdata.com/news/most-recent/attom-q1-2022-u-s-residential-property
-
https://www.bankrate.com/mortgages/mortgage-statistics/#statistics
-
https://my.ibisworld.com/download/us/en/industry-archives/1354/0/0/pdf/
-
https://www.reuters.com/markets/us/banks-raise-fed-terminal-rate-forecasts-after
-
https://my.ibisworld.com/download/us/en/industry-archives/1295/0/0/pdf/
