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More Mortgage Malaise, Higher Hopes For Home Equity

As 2023 stumbled to a close, the reality of higher-for-longer mortgage rates had taken a toll. Interest rates for the last five months of the year held firm at a decades-high 7%, and a lack of inventory kept home prices stubbornly elevated. Sales of existing homes remained at their lowest level since the 2008-09 financial crisis, and new-home building was well below pre-pandemic levels.

Given this backdrop, it’s no surprise that housing activity will likely remain depressed in the near to medium term, and that market participants will be eagerly scouring the horizon for any emerging sign of market recovery or rate relief.

The most immediate path to recovery in 2024 would be lower mortgage rates. Current rates have created a “lock-in effect” that has discouraged sellers from listing their homes. By industry estimates, nearly 80% of homeowners with a mortgage have a rate below 5%, and most of them are locked in below 4% (Figure 1). Clearly, aspiring homeowners can’t buy what’s not for sale, so what will it take to see a dip in mortgage rates that could increase inventory and create some stability in home lending?

Figure 1: Mortgage Debt By Note Rate

Interest rates on most outstanding mortgage debt is sub-4%, which is discouraging sellers and thus limiting inventory
Source: FHFA

Curinos expects many of today’s market challenges – affordability, inventory and lack of demand – to persist in 2024. At the same time, continued uncertainty about monetary policy and the potential end of rate hikes could apply some downward pressure on rates. The Federal Reserve’s most recent projections indicate this tightening cycle is close to an end, but just how close is the critical question.

While a dip in rates would certainly mitigate some of the market challenges and provide much-needed stability, it wouldn’t be enough to significantly shift demand or supply in 2024. Near-term positive momentum or green shoots would certainly be welcome, but a material recovery isn’t likely until 2025.

Home Equity Poised For A Rebound,
But When?

Given an annualized growth rate approaching 40% in 2022, the home-equity market appeared to have the tailwind needed for another banner year in 2023. But borrowers had different ideas.

Despite the sustained high level of tappable equity, rate-conscious homeowners throttled back their demand for borrowing against it. Curinos’ tracking of lender originations revealed a 35% year-over-year decline in home-equity lending through November 2023, setting annual originations back to pre-pandemic levels. With current market rates hovering at about 9.5%, these potential borrowers are experiencing the same sticker shock as potential buyers of new homes and, like those buyers, they’re waiting for some rate relief.

As we enter the first quarter of a new year – historically the lowest-performing quarter for home-equity originations – lenders might be asking themselves, “Will demand rebound in 2024?” To help answer the question, Curinos spent much of 2023 monitoring historical home-equity and mortgage demand, along with highly correlated macroeconomic conditions, to produce the industry’s first Home Equity Forecast.

The good news from the forecast is that, even with the Fed signaling that rates will stay higher for longer compared to prior rate cycles, home equity is encountering some of the same favorable tailwinds that it has over the past 18 months. But the two highly predictive wildcards that Curinos is monitoring closely are the National Homeownership Index Rate and The Conference Board’s Consumer Confidence Index. Any material shift in either or both, positive or negative, will ultimately determine this year’s demand for home equity.

Either way, Curinos’ current home-equity forecast modeling indicates 2024 will be another challenging year for lenders and will force some to reassess budgets if improvements don’t materialize in the first half of the year. But it’s not all doom and gloom. Our forecast also suggests that demand is poised for a dramatic turnaround in the second half of the year, driven in large part by expectations that rates will be lower (Figure 2). Whether this rebound will be enough to offset the projected stagnation of the first half, however, is an open question.

Figure 2: Curinos’ National Home Equity Forecast Modeling

Our research suggests that home-equity lending is positioned to bounce back in the second half of 2024, driven by expectations of lower rates
Source: Curinos Home Equity & Mortgage Origination data; Curinos data science modeling 

Right Time To Reevaluate Credit Standards?

In early 2023, market-leading housing experts were projecting moderate declines in home prices across the country, which sparked enough panic among many lenders to prompt them to scale back higher loan-to-value home-equity transactions. They began taking a serious look at borrowers at risk of being overleveraged on their homes and what that would mean for the overall health of their existing portfolios. Even today, lenders’ current appetite for credit risk is hardly robust. In the face of what they see as macroeconomic uncertainty, many are cautious about their buy box.

But Curinos suggests that 2024 might be the time for lenders to reconsider their stance on credit risk because the threat of increased collateral risk seems to have diminished. Market experts are now projecting sustained moderate growth of 1% to 6% in home values nationally, so whatever future collateral risk remains on the books may be mitigated.

And while higher loan-to-value lending is certainly not the key to material growth in 2024, making credit more accessible to potential borrowers can play a key role in improving customer sentiment. In a year likely to remain extremely competitive, that could give some lenders a meaningful leg up against the field.

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