After painfully stubborn inflation over the past year and a likely stagnation in the next, credit unions are preparing for an unsteady 2023. They’re particularly focused on climbing interest rates and a significantly depressed refinance and purchase mortgage market, but in spite of the uncertain economic situation, there are clear signs that community lending will remain a crucial pillar of support for homeowners around the country.
While inflation, rising rates, and shifting demand are having a negative impact on home values, there’s still strong tappable home equity for homeowners to leverage. Home equity loan and HELOC demand is projected to grow 25% YoY in 2023. It offers a secure asset for financial institutions and a dramatically lower interest rate than unsecured debt for consumers.
In my opinion; we’re not going to see near zero % interest rates for a longtime. And therefore the go-to-market strategy for maximizing a credit union’s total addressable market (TAM) must shift. That said, in times of economic uncertainty, credit unions are a vital source of stability in their communities, and they will continue to provide the personal, trustworthy service their members expect. With this in mind, here are four predictions that will help credit unions identify the opportunities and risks that lie ahead in 2023.
- Interest rates will remain high. Although the November and December CPI reports were encouraging (the year-over-year inflation rate is down to 6.5 percent), the Fed has made it clear that rates will remain elevated through 2023. A recent Bankrate survey found that economists expect a target range of 5.25 percent to 5.5 percent, though the Fed’s target could be affected by surging unemployment or other economic factors.
While there was significant credit union loan growth in 2022, high interest rates will lead to a slowdown this year. This will help credit unions manage the liquidity shortfall caused by declining deposits, and interest rates will likely begin to stabilize or decrease in late 2024 and 2025. In the meantime, credit unions will have to manage major declines in purchase and refi mortgage volume.
That said, credit unions can maximize on their member-life-time-value and offer more products to the members, by leveraging the demand for home equity and HELOC loans.
- Credit union members will continue to rely on home equity. At a time when 12 million Americans take out payday loans with average interest rates of almost 400 percent each year, the personal savings rate has tumbled, and credit card debt has increased more in the past year than in the preceding two decades, home equity will remain one of the most attractive ways to access funds.
Interest rates will remain much higher than most homeowners had already refinanced into or acquired, while the need for cash and lendable assets will persist. This provides a layer of security for both credit unions and their customers, even if the housing market contracts more than anticipated. Many homeowners want to consolidate their unsecured debt, and home equity remains one of the best ways to do so. At the end of the third quarter in 2022, the average U.S. homeowner had $196,000 in tappable equity – up 10 percent from the same time the previous year.
In the second quarter of 2022, Americans took out $66 billion in HELOCs – the largest amount in nearly three years. While the average credit card interest rate is over 21 percent for new offers and over 16 percent for existing accounts, the average HELOC rate is 7.7 percent. Homeowners receive a line of credit on their home equity, but are under no obligation to use the funds. This can provide them with a financial cushion in uncertain economic times, which is why it’s no surprise that the use of HELOCs is rising.
- A buyer’s market will emerge in the real estate sector. Consumers will likely be more conservative in 2023, which is already evident in how long homes are staying on the market versus six months ago. Prices and valuations will decrease , but while tappable home equity has fallen from its all-time peak of $20 trillion in the fourth quarter of 2021, it will remain healthy.
Credit unions have suffered a steep drop in mortgage originations. Among the 25 largest credit union mortgage providers, originations plummeted by 69 percent from the second to the third quarter of 2022 – from $43.2 billion to $13.3 billion. The Mortgage Bankers Association anticipates that lenders will see purchase originations fall by 2.7 percent in 2023, while refi originations are expected to decline by 5.7 percent. However, the largest drops will likely be in the first quarter.
As the refi rate has decreased due to high interest rates, homeowners have turned to HELOCs – which some large banks refuse to offer, thereby creating an opportunity for credit unions. This is a reminder that credit unions have several advantages as the economic situation deteriorates.
- Credit unions will forge partnerships with fintech companies. The next few years will bring unprecedented opportunities for credit unions to grow and innovate. In an effort to provide the highest level of personalized service, many credit union leaders are exploring partnerships with fintechs that can help them provide better member experiences and expand their products and services. In fact, 44 percent of credit unions regard fintech partnerships as a strong driver of growth compared to just 25 percent of banks.
There are countless forms of collaboration between fintechs and credit unions, and establishing these relationships will only be even more important as fintech becomes more entwined with the banking sector more broadly.
Although innovation will be critical for credit unions in the coming year, it’s ultimately a means to an end: helping credit unions provide the high-quality, personalized service their members expect. As credit unions leverage their unique strengths to weather the coming economic contraction, they’ll also be putting themselves in a position for long-term growth.