As we look ahead into 2022, it’s also important to peek into the review mirror for context around trends that will continue to impact the mortgage industry into the future. Of course, a year ago, our world continuing to deal with the ongoing pandemic, and we were all trying to determine what the “new normal” might be in our daily lives. As we learned more and began to see progress in combatting this all-pervasive virus, there were some signs of more activities getting back to more normal: being able to see friends and family again, attend school concerts, watch major sporting events with fans in the stands, and get together with relatives over the holidays. However, just when we seemed to be turning the corner, new variants or challenges arose – reminders that we still have challenges to overcome before we can completely move forward.
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Why does the pandemic have such an impact on the mortgage industry? Simply put, it drives a degree of economic uncertainty, which continued to keep rates low over the past year – and those factors helped drive significant refinance activity, as well as strong purchase demand.
Will the pandemic, now going on two years, continue to influence mortgage and finance? Let’s dig into some of our expectations and the impacts they will have on the housing industry as we head into 2022.
Economic Factors
A year ago, many new fiscal plans and strategies – implemented by governments across the world to aid workers, families, businesses and economies – were having impact across many areas. In the lending arena, the Federal Reserve had cut interest rates and, more importantly, provided substantial liquidity through a variety of programs meant to help calm the markets and provide needed support to millions of struggling citizens and businesses.
At the start of the pandemic, the central bank significantly cut the fed fund rate to near zero and started aggressively investing into the bond markets, which was a major influence in bringing rates down to historic levels. While fed fund rates do not directly impact mortgage rates (which are more closely tied to the 10-year Treasury yield), the two do typically trend in a similar direction. However, the liquidity the Fed brought into the bond markets had a direct impact on rates, keeping them near historic lows through most of the year. The Fed continued with these strategies throughout most of 2021 before finally changing course with its quantitative easing toward the end of the year.
Over the past few months, the Fed has started to implement changes to its policies – such as curbing asset purchases which impact the bond markets – and is now discussing upcoming rate increases, which are expected begin in mid-2022. Also impacting markets and the economy is the expiration of many of the strategies across the world meant to provide assistance to people and businesses. With the concerns surrounding rising inflation, and stock markets showing continued strength, there is a firm belief that central banks across the world will continue to pull back on these historic steps in early ’22, which should put upward pressure on rates across the globe.
What does this mean for the mortgage industry?
The first noticeable impact is expected to be on interest rates. After an extended period of time of mortgage rates setting new records or hovering near historic lows, all expectations point to a continuation of the recent trend of rates beginning to climb. While 30-year mortgage rates have hovered slightly below or just above the 3% mark for some time now, forecasts heading into 2022 are showing a slow yet moderate rise moving forward, ultimately reaching the 4% range by the end of 2022.
As rates continue to increase, of course, they have an impact on overall mortgage activity. Refinances are expected to drop dramatically year over year, as millions of homeowners have already taken advantage of lower rates during the past few years. However, due to significant value appreciation during that same time span, homeowners continue to find great opportunities to tap into this equity via cash-out refinances, at rates still considered very low based on historical averages. And even though rates will have gone up from historic lows, they should remain a positive influence on the purchase market at their expected levels, with the industry expecting a slight increase in total purchase activity once again in the year ahead.
Housing Inventory, Appreciation and Credit
One trend over the past few years has been a lack of housing inventory in most price ranges to support market demands – and without question, the pandemic made this problem even more severe. A year ago, there was a severe decline in the number of homes listed for sale, and growing economic stability drove strong purchase demand as well. This demand, coupled with decreased listings, led to another year of very strong price appreciation. Sellers receiving multiple offers remained the norm.
As 2021 played out, purchase demand remained very strong, and since the market had started in a hole due to a lack of inventory, it proved very difficult to make major progress in getting back to what is considered a healthy, balanced level. As we look forward into ’22, we do believe we’ll start to see some slight movement toward more balance. However, history shows that trying to “catch up” typically takes years, not months. While we continue to see this a factor moving forward, recent signs indicate at least a softening of the feverish levels seen previously at most price ranges.
Any easing in housing availability will help in the lower price ranges, where lack of inventory has had severe impact on more affordable neighborhoods as well as first-time homebuyers – an ever-important segment of the housing market that traditionally helps drive opportunity, as well as overall market stability. Lack of inventory, along with historically low rates, were the key drivers for the rapid appreciation seen over the past couple years. While there are many positives associated with property value appreciation, when it occurs too rapidly, affordability is a real concern. After double-digit increases in property values, reaching into the high teens this past year, experts now are forecasting these increases to slow moving forward. With inventory levels gaining and rates rising, we should see property value appreciation hit a more reasonable level of around 5% in the year ahead.
Affordability remains a struggle for many buyers, and as home prices continue to increase, the amount needed to make down payments and afford monthly mortgage payments poses an even greater challenge to homeownership. Hopefully, local and national programs (including those developed and implemented by Fannie Mae, Freddie Mac, FHA/VA and private companies) will help more homebuyers overcome these hurdles.
Early in 2020, we began to see temporary credit tightening associated with the uncertainties of the pandemic. These policies are now being pulled back. We expect to see continued slight, yet appropriate, loosening of credit requirements to support a healthy financing environment and overcome some of the financing challenges for still-struggling portions of the market.
Moving Forward
As we look forward to 2022, we’re excited about the future, and there’s much to be optimistic about. Based on economic forecasts, while rates are expected to increase, it appears they will remain very attractive (especially when considering historical levels), offering great financing options for buyers and for those looking to refinance and pull equity from their homes. Home appreciation is expected to continue, but at a more modest, healthy pace for the majority of the country, and the industry continues to bring creative solutions to support today’s homeowners.
Using new and improving technology, coupled with good old-fashioned professionalism, competitiveness and customer service, we expect great things for Bell, our business partners and our clients in 2022 as we apply our company’s values of family, service and giving back to the communities we serve.
If you are thinking about buying a new home, a vacation home or an investment property, or evaluating your mortgage on an existing property, Bell would 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 is the leader of Bell Bank’s mortgage division.
