Five Predictions Home Equity Lenders Should Be Tracking

Despite interest rate instability, homeowners with cash on hand still like borrowing

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At the beginning of 2022, interest rates were near zero, major stock indexes were hitting record highs, and home prices seemed to be rising inexorably. After a bruising year of soaring inflation, shrinking 401(k)s, and a cooling real estate market, many homeowners, buyers, and lenders didn’t anticipate just how severe the economic contraction would be in 2022.

For 2023, there are several trends in the real estate sector lenders should be following closely. From the persistence of high interest rates to declining demand and prices, the real estate market is shifting away from stratospheric valuations and record-setting mortgage origination volume. However, tappable home equity will remain strong as homeowners continue to rely on it over other forms of borrowing. Meanwhile, fintech companies will continue dedicating significant resources to home equity lending.

While lenders face a difficult economic environment in 2023, they will continue to provide stability for borrowers at a critical time. As inflation finally starts to ease and consumers contend with the effects of the Fed’s rate increases and a likely rise in unemployment, home equity will continue to be a vital source of financial security. Let’s take a closer look at the trends lenders should be focused on to navigate the next year and effectively serve their customers.

1. Homeowners will continue to prioritize home equity loans and HELOCs.

Despite surging interest rates, homeowners with cash on hand still prefer to borrow money instead of depleting their savings. This is especially true at a time when the personal savings rate has collapsed to its lowest level since the summer of 2005, while credit card debt has spiked by 15 percent – the largest year-over-year increase in more than two decades. Tax deductions are also available on home equity interest for homeowners who use their loans to buy, build, or substantially improve their homes.

These are just a few of the reasons homeowners will increasingly draw upon their lendable equity to consolidate unsecured debt and avoid high interest rates.

2. Tappable home equity will remain strong despite the economic slowdown.

After months of rocketing inflation, prices are finally getting under control. The inflation rate fell from a multi-decade high of 9.1% year-over-year in June to 7.1% in November, and this trend is likely to continue into 2023. However, there will likely be reduced consumer demand this year, and the housing market is no exception. Although this will lead to a decline in real estate valuations and a buyer’s market, lenders should remember that the average American homeowner still has almost $217,000 in tappable home equity.The equity market is likely to show resilience in 2023, which will be a boon to banks and credit unions. While a jump in unemployment and a corresponding rise in delinquency rates could lead to tighter underwriting guidelines, this doesn’t appear to be inevitable.

3. It will be a long time before the Fed interest rate nears zero again.

It’s unlikely that we’ll see more huge rate increases in 2023, but the current rate is at its highest level in 15 years and the Fed projects that it will raise rates over 5 percent by the end of the year. As inflation falls, rates will gradually begin to come down in mid-to-late 2024. While the Fed may be forced to drop rates more rapidly if unemployment accelerates too quickly, lenders should expect a steady downward adjustment in late 2024 and 2025. Regardless of the Fed’s pace, we aren’t going to see extremely low interest rates for quite awhile.

4. Refi and purchase mortgage volume will be sharply lower.

Transunion anticipates that mortgage purchase originations will be just over 4 million in 2023, which would be a significant decline from 7.4 million in 2020 and 8 million in 2021. Meanwhile, refinance originations are projected to fall to 1 million – a historic low. Since May 2022, the median number of days on the market for homes has almost doubled from 31 to 56, which indicates that homebuyers are being more cautious. As interest rates continue to rise and the overall economic situation remains precarious, lenders should expect refi and purchase mortgage volume to remain suppressed.

As consumers demand online loan solutions and digital home equity applications increase dramatically, fintech companies are well-positioned to help lenders keep pace with these changes.

5. Fintech investors are piling into home equity lending.

As homebuyers reassess their options for financing and lenders attempt to make the origination process more user-friendly, fintech investors are rushing to enter what they regard as a market primed for disruption. As consumers demand online loan solutions and digital home equity applications increase dramatically, fintech companies are well-positioned to help lenders keep pace with these changes.

A 2021 survey of bank and credit union executives found that 81 percent regard fintech partnerships as important – an increase from 49 percent in 2019. As consumer expectations continue to shift toward digital lending and loan management, fintech partnerships will be more and more critical for home equity lenders.

With the economy reeling from persistent inflationary pressure, consumers taking on higher levels of debt and cutting into their savings, and job losses likely in the immediate future, it’s no wonder that the real estate market has been suffering. After years of low interest rates and swelling valuations, a correction is underway.

But lenders should remember that homeowners will continue to use their reserves of tappable home equity and avoid financially crippling alternatives like credit card debt as they navigate a difficult economy in 2023. Lenders should also expect a period of significant innovation in the sector as fintech companies develop ways to make home equity more accessible and banking services more user-friendly. While there are major obstacles ahead, 2023 will give lenders an opportunity to distinguish themselves in an increasingly dynamic industry.