CCM Trend Tracker – Reflections from the Last Year

23, December, 2022

The CCM team recently sat down with Chris Bennett, principal of mortgage hedge advisory firm Vice Capital Markets, for his expert insights on the state of the market in 2022 and what to expect in 2023. Here’s what he had to share: 

How would you summarize the 2022 market? 

2022 falls into the category of extraordinary, maybe even unprecedented. This was the most severe bear market in bonds since the year before the U.S. Treasury was founded.

The good news is, as punishing and violent of a move as it was, we can declare this bear market to be over. It doesn't mean that rates aren’t ever going to go up again, but we can really define this bear market ending, really with the Consumer Price Index (CPI) print in November that, for the first time in nine months, didn’t miss to the wrong side, it missed to the good side.

The Fed raised rates for the seventh time in 2022 in mid-December. What’s the impact on the industry?

We went through a long period where Fed meetings meant very, very little. Now, Fed meetings mean a lot. What the market really focused on with this Fed announcement was its summary of economic projections for GDP, unemployment, etc.

Fifty basis points on rates was “baked in the cake” as they like to say, so that part was no surprise. The market hoped that while we'd get 50 basis points, this was going to be about it. The market was baking in one or even two easings into 2023. The Fed let the market know that's not their plan. The Fed came out and said, as they've said the last couple times, we're going to be higher for longer. We're not going to repeat mistakes that were made in the 1970s.

What positives were there in the market in 2022?

With the Fed making a commitment to beating down inflation demons, we will have competitive and decent interest rates for a long time to come. If they didn't get a hold of this, we’d be looking at a much longer period of writing loans at 6-8%, maybe even back to 9-10% like we were doing in the early 1990s.

By looking at how inverted the yield curve is right now with short-term rates being much higher than long-term rates, it’s an indication the market believes that the Fed is going to succeed in their goal of bringing down inflation. That bodes well for the mortgage industry long term.

What should we be watching in the housing market in 2023?

It's going to take a while, possibly even a couple of years, for us to get back to the kind of home sales levels that we had before the pandemic, but I think it's going to slowly trend in the right direction.

I don’t see a housing market crash of any kind. I don't see it being down 15% or 20%. We've seen a few percentage points back off. We're going to see a period of house prices not really going anywhere. The good news is that the real value of housing, the inflation-adjusted value of housing now that we have inflation that's still running 5-8% percent, will help us catch up.

What opportunities will lenders have in 2023?

Cash-out refinances will be an opportunity. Home equity loans and second mortgages with lines of credit are based on prime. Now we have a case where, at the end of the first quarter, we will have Fed funds at 5%, which means prime will be at 8%. So that's going to take a lot of that business that was going into HELOCs and second mortgages and convert that over to cash-out refinances if you can get a cash-out refinance at 5.25%. So that's one thing that will be a big difference.