From global economic trends to local housing affordability, numerous factors promise to shape the real estate market heading into the final quarter of the year. In general, the economic outlook both globally and within the U.S. remains subdued as we approach 2024, with many forecasters highlighting inflation and monetary policy as the drivers.
The Conference Board has predicted global GDP to grow by 2.9 percent in 2023, slowing to 2.5 percent in 2024. Emerging economies are expected to fare better than the U.S. and Europe, which are both anticipating lackluster performances once all is said and done this year. Although the U.S. economy has been surprisingly resilient in the aftermath of the pandemic, boasting strong employment numbers and healthy consumer spending, the Conference Board is anticipating a short and shallow recession in 2024, largely due to high interest rates, ongoing inflation, mounting consumer debt and dissipated consumer savings.
All of these factors are likely to prey on the housing market as well, and may serve to keep new homebuyers out of a market that has become increasingly unaffordable due to escalating interest rates and stubbornly limited inventory, which has kept prices elevated.
Chilly Q4 housing market
The housing market typically slows in the fourth quarter as buyers step away amid the approaching holidays. However, many industry pundits are predicting housing sales to slow faster than in years past due to the plethora of economic challenges homebuyers are facing.
In its September outlook report, Fannie Mae noted that mortgage origination activity had slowed to levels not seen since 2011.
“The new home market, which showed surprising strength over the first half of 2023, due in part to a limited inventory of existing homes for sale, may now be taking a breather,” Fannie Mae reported. “We forecast total home sales to be around 4.8 million in 2023, which would be the slowest annual pace since 2011 and 4.9 million in 2024. Similarly, our expectation for 2023 mortgage originations was downgraded from $1.60 trillion to $1.56 trillion in 2023 and from $1.92 trillion to $1.88 trillion in 2024.”
Further exacerbating the situation, some buyers are sitting out due to fears that housing has become overvalued and are hesitant to buy a home that may lose its value, if the market should take a sudden downturn. This is a regional reality, however. While the run-up in prices over the past few years in several western cities is ripe for a correction, many markets across much of the country increased at a moderate and sustainable pace, boding well for price stability.
New home sales decline
Despite builder concessions to offset high interest rates, new home sales continued to drop as the summer waned.
Sales of newly built, single-family homes in August fell 8.7% to a 675,000 seasonally adjusted annual rate, according to data from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau.
“Builders continue to grapple with supply-side concerns in a market with poor levels of housing affordability,” said Alicia Huey, chairman of the National Association of Home Builders (NAHB) and a custom home builder and developer from Birmingham, Ala. “Higher interest rates price out demand, as seen in August, but also increase the cost of financing for builder and developer loans, adding another hurdle for building.”
As a result of all of these factors, builder confidence in the market for newly built single-family homes in September fell five points to 40, according to NAHB.
Consumer confidence mixed
With employment numbers on solid ground to date, consumers generally express optimism not only about their own jobs, but about available prospects in the larger market.
On the downside, the Conference Board noted in September that overall consumer confidence fell for the second month in a row in September with consumers expressing concern about rising prices, the volatile political situation and rising interest rates.
Interest rates: The wrench in the gears
Recognizing that the ongoing interest rate hikes are paralyzing the market, NAHB, the Mortgage Bankers Association (MBA) and National Association of REALTORS (NAR) joined forces in October to ask the Federal Reserve to refrain from further rate hikes.
In their October 10 letter to the Fed, the organizations pointed out that a primary source of inflation has been housing, highlighting that in July alone, shelter inflation was responsible for 90% of the gain for consumer prices.
Rather than exacerbating the problem with higher interest rates, the organizations suggested the federal government should be focused on facilitating the construction of affordable housing.
“Sustained, widespread or further increases in interest rates make this economic goal more challenging by limiting lot development and home construction, exacerbating housing supply, and pricing out millions of households from the goal of homeownership,” the letter said.
In September, MBA SVP and Chief Economist Mike Fratantoni acknowledged that the FOMC is still considering further rate hikes and in addition signaled that much-anticipated rate cuts would come later and slower than anticipated in 2024. But he remained optimistic that 2024 would see a turnaround.
“We expect that inflation will continue to drop closer to the Fed’s target, the job market will continue to slow, and that mortgage rates should begin to reflect that the Fed’s moves in 2024 will be cuts – not further increases,” Fratantoni said in his commentary. “This should provide some relief in terms of better affordability for potential homebuyers.”
Affordability
Limited affordable housing continues to plague the market overall. In part, homebuilders have begun to scale back the size and scope of amenities in their new builds to try to address the immediate issue of rising interest rates, but those efforts do not address the wider issue that can only be resolved by a concerted effort to address the problem on both the national and community level.
Affordable housing advocates offer several pathways to improved inventory, including incentivizing builders to build more affordable housing, increasing production of manufactured housing, addressing zoning and other restrictions that are preventing the creation of affordable housing where it is most needed, expanding the National Housing Trust Fund, and increasing resources for Federal affordable housing programs. The continued strength of the economy overall bodes well for a brighter 2024 for the housing market. However, the pace of recovery hinges on the FOMC effectively meeting its target to curb inflation, allowing interest rates to retreat. Concurrently, industry groups, local communities, and the federal government must tackle the pressing issue of housing affordability.
According to PositivePsychology.com, as humans we are innately wired to pursue instant gratification. It’s natural for us to want good things, and to want them NOW. In fact, the urge for immediacy surely benefited pre-modern humans as their very survival often hinged upon making instantaneous decisions followed by taking immediate actions (e.g.“there’s a Tyrannosaurus rex headed my way … I’d betterrun and take cover!”). Humans today are not so different from their ancient ancestors – we, too, want immediacy, especially when it comes to the acquisition of wealth – whether that translates into the speed with which we receive funds or the swiftness with which we get title to real property under contract.
A Catalyst Corporate Credit Union blog reported that recent studies have shown “[a] staggering 70% of consumers express that having faster payment options from their financial institution is an important driver of satisfaction.” Thanks to advances in fintech, we now have a payment rail with two trains riding upon it to deliver that instant gratification. These two “trains” are Real Time Payments (RTP) and FedNow. They both move so FAST (almost instantaneously) that you and your customers can enjoy the ability to transfer funds 24/7, 365 days of the year in real time. With no waiting periods to transfer funds, just imagine how much faster your closings can take place – they can occur on holidays, weekends, and anytime convenient for you and the parties to the transaction!
Since 2017, RTP has been operated by The Clearing House (TCH), a consortium of member financial institutions; TCH’s RTP Network lists approximately 373 participating Financial Institutions (FIs).
On July 20, 2023, FedNow – the Federal Reserve’s interbank, instant payment infrastructure – went live; it launched with35 participating FIs, the U.S. Department of the Treasury’s Bureau of the Fiscal Service and 16 service providers, but it has the potential to service all depository institutions eligible to hold accounts at the Reserve Banks – currently estimated at more than 10,000 banks and credit unions! FedNow promises to be a real game-changer for the national economy, and especially for our industry.
Let’s talk about what FedNow can do for you. At this time, the FedNow Service supports account-to-account and consumer-to-business bill pay use cases. The maximum credit transfer amount is $500,000, but participating FIs have the option to provide a lesser amount (so you may want to check with the transferor’s FI in advance to make sure that you know its dollar limits). With FedNow, businesses and individuals can also request a payment (referred to as a RFP or “Request for Payment”) from a recipient. For example, with FedNow you can electronically send “Betty Buyer” a request for the balance of cash needed to close her transaction; there is even a “zero-dollar request for payment” pre-validation tool available to make sure that the end-customer has the ability to receive and act on the RFP prior to the biller actually sending one. We can anticipate that FedNow will be able to do even more in the future as its functionality is expected to increase in phases. To learn more about FedNow, and when and how it may be available for your use, please visit FedNowExplorer.org.
Lastly, if you want to know more about the BIG picture – RTP, FedNow, the Good Funds Laws, and Payment Service Providers (e.g. Venmo and PayPal) – and how these mechanisms and laws affect each other and work together, read our in-depth white paper, “Moving Money in a Real Estate Transaction.”
Navigating the complexities of our industry is indeed challenging, and it humbles me when independent agents confide in our team, sharing their concerns and ideas. One recurring issue you’ve brought to light centers around identity verification and the inherent risks involved in this key element of the transaction. I am delighted to announce that Alliant National has collaborated with Finigree, a leader in financial and payment technology solutions, and developed a robust identity verification system – SecureMyTransaction.
SecureMyTransaction is designed to equip you with the information you need about both buyers and sellers to advance your transactions with confidence. The technology applies a multi-factor identity verification process that cross-checks mobile device ownership and location, credit bureau information, bank account validation and ownership, payoff and proceeds verification, knowledge-based authentication, FinCEN and OFAC searches, along with Alliant National Underwriting Alerts.
With verified identity information at your fingertips, you’re empowered to protect against seller impersonation fraud, vacant property fraud, and deed and document forgeries. Scams like these can have profound consequences, including financial loss, reputational harm and regulatory sanctions. SecureMyTransaction is thoughtfully designed to help you mitigate these risks.
This solution – which is initially being offered exclusively to Alliant National agents nationwide – will be unveiled tomorrow at our annual Florida Seminar in Orlando. For those attending, we look forward to presenting this new tool to you and hearing your initial thoughts.
For those who will not be with us in Orlando, I hope you will take the opportunity to learn more about this solution built specifically for independent title professionals like you. You can visit SecureMyTransaction.com for details, or reach out to Alliant National’s Bob Grohol (BGrohol@AlliantNational.com, 440.228.0826) to schedule a demo.
As you familiarize yourself with this new tool, whether at the seminar or from afar, I invite you to share your thoughts and feedback. We have developed this system with you in mind, and your insights are invaluable to us. Please feel free to reach out to me, to Bob, or to any member of your Alliant National team.
This spring, the Financial Crimes Enforcement Network (FinCEN) announced its plan to release over the coming months multiple final rules and proposed regulations required by the Corporate Transparency Act (CTA) and the Anti-Money Laundering Act of 2020 (AMLA), including highly anticipated rules that would codify Geographic Targeting Order (GTO) disclosure requirements.
Congress enacted CTA and AMLA to address the growing problem of criminals and foreign actors funneling illicit funds into the U.S. financial system and, of particular concern, into the U.S. real estate market. It is estimated that more than 2 million corporations and LLCs are formed in the U.S. each year, many established by criminal elements as a cover for terrorist financing, drug dealing or human trafficking. Law makers are hoping the proposed regulations under both CTA and AMLA will make it easier for federal and state law enforcement agencies to track and unmask criminal enterprises.
Among its many obligations under these new laws, FinCEN has been tasked with creating and managing a national registry of beneficial owner information (BOI). Previously, BOI reporting was restricted to larger corporations under SEC regulations, but this has provided a very limited pool of information and was largely ineffective in identifying the true extent of the money laundering activities. Under CTA, Congress is attempting to capture a broader swath of data. FinCEN is required to issue three regulations to implement this new registry.
Under the AMLA, FinCEN is also required to issue regulations addressing whistleblower incentives, real estate transaction reports and records, counter terrorism risk assessments, and more.
Here is an overview of FinCEN’s timeline.
July 2023 – Whistleblower incentives and protections
FinCEN has created an Office of the Whistleblower and currently accepts tips while they are developing formal regulations under the Anti-Money Laundering Whistleblower Improvement Act, which was signed into law on December 29, 2022.
The agency intends to issue an NPRM in July to address provisions of the Act entitling whistleblowers to an award of between 10 and 30 percent of the value of monetary sanctions above $1 million collected as a result of an enforcement action. Provisions will include the establishment of a Financial Integrity Fund to be administered by the Treasury Department.
August 2023 – Real estate transaction reports and records
In December 2021, FinCEN issued an advance notice of proposed rulemaking (ANPRM) to solicit public comment on potential requirements under the Bank Secrecy Act (BSA) and AMLA for certain persons involved in real estate transactions to collect, report, and retain information. In August, FinCEN will release a NPRM that will address the scope of the BSA requirements, for instance the type of real estate transactions affected, i.e. residential or commercial and any monetary thresholds, as well as what persons or entities involved in the real estate transaction will be responsible for the reporting requirements.
Senator Sheldon Whitehouse (D-RI) submitted a comment to FinCEN highlighting the Geographic Targeting Orders (GTOs) program established in 2016 and asked the agency to codify and strengthen the disclosure requirements beyond the pilot program. The GTOs require title insurance companies to report identifying information about the individuals who own 25% or more of the equity interest of a corporate entity used in all-cash purchases of residential real estate in the geographic regions and monetary thresholds identified in the pilot program.
Look for the August NPRM to include elements of the GTO pilot program.
September 2023 – BOI Access and Safeguards Final Rule
A final rule entitled Beneficial Ownership Information Access and Safeguards, and Use of FinCEN Identifiers for Entities will be issued by FinCEN in September.
The proposed regulations will establish protocols to protect the security and confidentiality of the BOI that will be reported to FinCEN pursuant to Section 6403 of the CTA and will establish the framework for authorized recipients’ access to the BOI reported. The final rule will also specify when and how reporting companies can use FinCEN identifiers to report the BOI of entities.
This rule is the second of three rulemakings FinCEN is required to issue under the CTA. The first rule, the BOI Reporting Rule, was issued on September 30, 2022, and requires most corporations, limited liability companies, and other similar entities created in or registered to do business in the United States to report information about their beneficial owners to FinCEN.
November 2023 – SARs pilot program
In November, FinCEN will issue a final rule establishing a limited-duration pilot program for sharing suspicious activity reports (SARs), in accordance with Section 6212 of AMLA.
The pilot program permits a financial institution with a SAR reporting obligation to share SARs and information related to SARs with the institution’s foreign branches, subsidiaries, and affiliates for the purpose of combating illicit finance risks, subject to approval and conditions set by FinCEN. The rule aims to ensure that the sharing of information is limited by the requirements of federal and state law enforcement. It addresses potential concerns of the intelligence community and is subject to appropriate standards and requirements regarding data security and the confidentiality of personally identifiable information.
December 2023 – National exam and supervision priorities
In December, FinCEN is expected to issue an NPRM implementing section 6101(b) of the AMLA that establishes national exam and supervision priorities.
The proposed rule incorporates a risk assessment requirement for financial institutions and requires financial institutions to incorporate AML/CFT Priorities into risk-based programs. Once finalized, this proposed rule will affect all financial institutions subject to regulations under the BSA and have AML/CFT program obligations.
December 2023 – Customer Due Diligence Rule
The third required rulemaking in the BOI series, the Customer Due Diligence (CDD) NPRM is expected to be issued in December. Section 6403(d) of the CTA requires FinCEN to revise its CDD requirements for financial institutions to account for the changes created by the two other rulemakings in the BOI series. This rule is significant because it will address discrepancies between how the CDD Rule and the CTA define beneficial owner and questions regarding how financial institutions can or should access BOI to comply with the CDD Rule.
Final note
Each of these rules carries unknown and potentially weighty requirements for the mortgage and real estate industries in general and in some aspects specifically for the title insurance industry. At Alliant National, we are committed to keeping you informed about regulatory requirements that could affect your operations. Stay tuned for more updates as FinCEN continues to move through the rulemaking process.
As if there wasn’t enough uncertainty coming into 2023, the failure of three banks in March has darkened the outlook for an economy that otherwise seemed to be holding its own in the first quarter.
The banks affected had significant exposure to technology and cryptocurrency, and included:
Silvergate Bank (cryptocurrency) announced on March 8 it was winding down due to losses in its loan portfolio
Silicon Valley Bank (technology-start up lender) taken over by California regulators after experiencing a run on the bank due to its failure to raise needed bank capital
Signature Bank (cryptocurrency) closed by bank regulators, citing systemic risks
Although state regulators, the FDIC and the U.S. Treasury Department all stepped in quickly to attend to the failed banks and reassure the entire banking system, there were plenty of investors, industry pundits and business owners with the jitters in the weeks that followed.
The question for the housing industry is, how might the banking industry problems affect the long-term outlook for real estate sales in general and interest rates in particular?
Credit tightening
The most immediate concern highlighted by many industry analysts is that nervous banks may tighten their credit standards, affecting every aspect of lending, from consumer credit and auto loans to residential and commercial mortgage loans.
Susan M. Wachter, Wharton professor of real estate and finance, said bank investors are anxious about real estate lending because commercial real estate lending has become “unattractive” due to rising vacancies.
Speaking on the Wharton Business Daily radio show that airs on SiriusXM, Wachter said, “Banks are likely to respond to their investors’ distress by lending less, and this is not a good thing for real estate.”
But she quickly qualified her remarks by noting that an “economy-wide credit crunch” would most likely be avoided, given the federal government’s quick response that quelled fears within the banking industry.
The real estate industry is also keeping its eye on what this all means for the economy in general and further potential interest rate escalation.
Looming recession
Responding to stronger-than-expected economic data, Fannie Mae’s Economic and Strategic Research (ESR) Group revised upward its first quarter 2023 GDP forecast in its latest monthly commentary, projecting a modest recession to begin in the second half of 2023, rather than in Q2 as previously forecasted.
“While uncertainty has risen following turbulence in the banking sector, the ESR Group noted that bank failures often foreshadow economic downturns,” Fannie Mae stated. “As such, the ESR Group believes that the recent events may act as the catalyst that tips an already precarious economy into recession, primarily via the combination of tighter lending standards among small and midsized regional banks and weakened business and consumer confidence.”
In its March 2023 release, the Conference Board mirrored Fannie Mae’s outlook, saying U.S. GDP growth defied expectations in late 2022, and early 2023 data has shown unexpected strength. The Conference Board said this is due to the fact that consumers have resisted the dual headwinds of high inflation and rising interest rates.
In light of this, they upgraded the Q1 2023 forecast to 1 percent growth. However, they also continue to forecast that the U.S. economy will slip into recession in 2023 and expect GDP growth to contract for three consecutive quarters starting in Q2 2023, largely due to persistent inflation and Federal Reserve hawkishness.
Minutes from the March Federal Open Market Committee (FOMC) meeting released on April 12 also indicated that the potential economic effects of the recent banking-sector developments would most likely result in the economy falling into a mild recession starting later this year. But given the underlying economic fundamentals, the participants saw this as short-term, with a recovery over the next two years.
Inflation and interest rate outlook
Inflation dropped from a high of 9.1% in June to 6.5% in December, but then slowed its pace of decline, easing only a half-percent to 6% over the course of the first two months of 2023. This slower pace did not impress the Federal Reserve, and so in spite of the banking crisis that was evolving during its March meeting, they raised the federal funds rate another 25 basis points.
However, the March numbers were more encouraging, with the CPI rising only 5% over the last 12 months, according to the April 12 release by the U.S. Bureau of Labor Statistics. This represents the smallest 12-month increase since the period ending May 2021, and shows that inflation is continuing to cool off in the wake of dramatic increases in interest rates.
More than half of respondents in Bankrate’s First-Quarter Economic Indicator poll said the all-important federal funds rate is likely to peak at 5-5.25%, indicating they believe the Fed will only raise rates one more time. Slowing inflation, the banking crisis, and recessionary indicators could all play into the Federal Reserve’s decision to put an end to rate hikes for the remainder of 2023.
In that same survey, more than 80 percent of respondents said the Fed was unlikely to make any move to cut interest rates until 2024, in an attempt to give the economy more time to cool down.
Lawrence Yun, chief economist of the National Association of Realtors, said he believed the Federal Reserve would take into account the banking crisis and its overall effect on the economy in considering further rate hikes, opining in an interview for Realtor Magazine, “The Silicon Valley Bank failure, along with a few other banks, means that the Federal Reserve cannot be so aggressive in raising its short-term interest rates. Therefore, mortgage rates will decline.”
In the final analysis
The economy has consistently reacted in non-traditional ways since the onset of the pandemic, constantly surprising pundits with its persistently healthy fundamentals. The unexpected strength in the employment sector in the first quarter of 2023 and the better-than-expected growth in GDP were acting together to moderate recessionary concerns until the March bank failures reawakened those fears.
The same can be said for the real estate industry. In spite of high mortgage rates, real estate sales showed some improvement in February, and homebuilder sentiment has been on the upswing with new permits on the rise.
But the banking crisis has added another element of uncertainty into the mortgage and real estate industry for the foreseeable future. While it could precipitate lower interest rates as Yun suggested, tightening lending standards could well offset any gains realized.
Only time will tell how all of this will play out as the industry continues to keep a watchful eye on how the Federal Reserve handles both the banking crisis and interest rates in the coming months.
