Mortgage Purchases Soaring, Branches Declining: Raddon

What does 2019 hold for the economy and industry/? Lower GDP growth, flatter consumer debt, Fed rate increases, Mortgage purchases exceeding 75% of total volume, declining net interest margins and branches.

Those are some of the predictions from Lombard, Ill.-based Raddon, a Fiserv company and provider of research, analysis and strategic guidance to financial institutions.

“2018 was a good year for the economy generally and for the financial services industry.  We experienced reasonably good GDP growth, especially in the second and third quarters, and we spent the entire year at an unemployment rate of 4% or lower. In the financial services sector, loan growth continued at a strong pace, to the point that many financial institutions are facing liquidity concerns and for the first time in over a decade are engaged in deposit wars. Earnings also improved for the majority of financial institutions, a result of improving net interest margins helped by four rate increases by the Federal Reserve,” Bill Handel, vice president, research, Raddon, said.

What about 2019? Raddon providing a rundown of what to expect this year.

GDP growth in 2019 will be lower than 2018 but not negative. Continuing threats of government shutdowns as well as trade conflicts contribute to an uncertainty.  Global economic weakness could also influence conditions in the U.S. as will mitigation of the stimulative tax reduction effect. “We don’t expect a recession to happen in 2019, but we anticipate that GDP growth for the year will be less than two percent,” Handel said.

Consumer debt levels will flatten out.  Raddon believes concerns of re-entering the debt crisis of ten years ago are overblown. Consumer loan growth since the start of this recovery in June 2009 has averaged 4.7% per year, which is robust growth.  “However, if you back out student loan debt, then consumer debt has risen by only 2.7% per year,” Handel noted. “What this says is that other than student loans, consumers have not grown their consumer debt at any appreciable level.” Raddon expects this trend to continue in 2019. “We anticipate a reduction in new car sales in 2019 versus 2018 results, and expect stabilization of credit card balances. And while we don’t expect a dramatic slowdown in student loan debt growth.”

Consumer price levels will rise between 2-3%. Despite the rapid expansion of the Fed’s balance sheet since the financial crisis’s onset in late 2007, Raddon held there is little evidence of inflation.  “In fact, in examining the GDP Implicit Price Deflator data, in no year other than 2011 have prices risen faster than two percent since this recovery began (final 2018 data is still unavailable).” Raddon does anticipate prices rising at a faster pace this year.

Fed rate increases will be limited to one this year. In 2018, the Federal Reserve increased rates four times by 25 basis points each time. “Many if not most prognosticators are predicting that the Fed will stand pat for 2019 – no rate increases – and this is indeed very possible,” Handel wrote. “However, we anticipate the economic conditions will stabilize, unemployment will remain very low and inflation will ratchet up.” The result: The Fed increases its target rate in the third quarter.

Mortgage activity for purchases will be more than 75% of total mortgage volume. In 2018 refinance activity was less than 30% of total volume. Three factors are behind this change: rising interest rates reduced or eliminated the economic refinancing value, all who can refinance have done so; and migration of millennials into their 30s, the traditional home-buying decade. Raddon anticipates purchase activity will be higher in 2019 than any year since 2006 and 2.5 times higher its lowest point in 2011

Net interest margins will decline due to higher cost of funds. Older, lower rate loans have been replaced with new, higher rate loans; loan volume has increased and replaced generally lower yielding investments; and the cost of funds has not increased appreciably, at least for credit unions and many community banks. “While loan yields will continue to rise in 2019 as older loans are replaced with new loans, the paucity of rate increases will limit the increase in loan yields,” Raddon suggested.

Branch counts will decline by 2.5% to 3.0%. In 2018 U.S. branch counts declined by slightly more than 2%, led by the largest banks who closed 3% or more of their locations. Credit unions grew their number in 2018. “It’s important to remember that even with these branch closures, the number of banks and credit union branches relative to population remains at very high levels historically,” Handel said. Raddon expects the largest banks continuing to shed physical locations at a rapid pace, and pushing consumers toward digital with remaining branches migrating from transaction hubs to sales and service centers.