Interest rates and inflation are among the factors clouding the lending outlook for 2022.
If ever we needed a crystal ball, it would be now.
By all accounts, 2021 was filled with uncertainty. The year began with some economists predicting a slow recovery and a potential housing bubble crash. That clearly didn’t occur.
The great news on the efficacy of the vaccines and the return of consumer confidence were offset by inflation fears and supply chain issues, which resulted in a wild ride for both consumers and businesses. Yet, the stock market had a stellar year, with the S&P 500 increasing nearly 27 percent.
In the housing sector, the demand for new and existing homes soared in 2021 primarily due to record low interest rates and low inventory. While COVID restrictions adversely affected some industries, such as hospitality, many businesses were able to adapt to the uncertain times and even thrive, especially with added assistance offered by government programs like the Paycheck Protection Program and Economic Injury Disaster Loans.
There is legitimate speculation about rising interest rates due to inflation, tight labor markets and strong stock market performance. Federal Reserve officials labeled inflation the U.S. economy’s biggest adversary at their final meeting of 2021 – even more so than the surging omicron variant – and hinted at three rate hikes for the year ahead.
I believe the Fed cares about both the performance of the stock market and housing prices – it’s nearly impossible for me to think otherwise. The Fed does not want to take the punch bowl away by crushing the stock market or making housing costs increase, any greater than they currently are, by aggressively increasing rates too soon. I don’t see 30-year fixed mortgage rates reaching 4 percent any time soon.
Given that, what does 2022 look like for residential and commercial lending? That is where the wish for the crystal ball comes in. Since the start of the pandemic, banks have dealt with unprecedented disruptions and challenges. It appears that 2022 may be no different.
Opportunities Emerge from Pandemic
Despite the pandemic, commercial lending has remained robust and healthy. Thanks in part to the competent and compassionate way banks handled PPP loans and their forgiveness, small business satisfaction with banks reached a new high in 2021, according to J.D. Power. It is my hope that community banks will continually build on the goodwill they earned among business banking clients by offering a more comprehensive range of services and access to timely credit as they recover from the pandemic.
Recent supply chain bottlenecks and shortages have increased overall costs and adversely affected production throughout many industries, including the housing and commercial building sectors. Many building contractors are frustrated with rising costs and delays in product deliveries, which unfortunately continue to extend project completion dates.
The increase in inflation, while expected to be transitory, appears to be hanging on longer and rising higher than forecasted. Eventually, if unabated, this will result in lower profitability and cash flow will be strained. However, I am optimistic that inflation will normalize in the latter part of 2023, and the bottlenecks in the supply chain will subside by the end of this summer.
Competition for commercial loans remains strong, but a key component in commercial lending is building a solid relationship between the borrower and the loan officer. Those banks that have gained new customers during the pandemic must now focus on retaining them. Opportunities to do that include embracing a combination of “high-tech/high-touch” experience that today’s customers covet.
Homeowners Need Banks
On the residential lending side, the forecasted rise in interest rates will likely result in a moderation of home price increases but certainly not a collapse in values like we experienced during the Great Recession following the financial crisis.
And what about the refinance market? Rising interest rates almost always impact the refis, but I am confident that offering fairly priced products along with excellent service and superior technology will help in capturing a fair share of the market. In fact, rising rates are a competitive advantage for the Institution for Savings. As interest rates rise, customers tend to do research on their own for the best rates rather than contacting mortgage brokers or, in the case of purchases, asking real estate agents to direct them to a lender.
Michael J. Jones
Certainly, another trend that started before the pandemic is the exploding use of online mortgage applications. In 2021, approximately 90 percent of our residential mortgage applications came to us electronically. This is not surprising given the growing number of buyers who are purchasing homes often only seen virtually. According to a new report from real estate brokerage Redfin, 63 percent of 2021 homebuyers made at least one offer sight-unseen, never setting a foot inside the property.
One trend that I predict will not change in 2022 is the benefit of using a local bank for your mortgage. While the home financing process often begins electronically through a bank’s online application portal, a face-to-face interaction is often needed to complete the process. Buying a home is among the biggest decisions in one’s life, and building a relationship with a bank loan officer cannot be underestimated.
On the bright side, we survived and thrived in 2020 and 2021. The banking industry is stronger than ever. We should remain confident that we can handle any uncertainty around inflation or changes in interest rates – but a crystal ball would make it easier, of course!
Michael J. Jones is president and CEO of Newburyport-based Institution for Savings
