LOMBARD, Ill.–Look for just a single Fed rate increase in 2019, for consumer debt levels to flatten, and for purchase mortgages to dominate the business, according to a new forecast from Raddon. Saying “our predictions for 2018 were remarkably accurate,” here’s a look at what Raddon is forecasting for 2019:
Prediction: GDP growth in 2019 will be lower than 2018 but not negative.
“There are a number of factors which will drive this, but a major factor is uncertainty,” pointing to threats of government shutdowns and trade conflicts as some of the drivers of that uncertainty. July “will officially rank as the longest in U.S. economic history, exceeding the 10 year recovery from March 1991 to March 2001 during the Clinton and Bush administrations. Interestingly, it will also have the dubious distinction of being the lowest growth recovery in modern times. All recoveries end, and this recovery is at its tail end, which means lower growth.”
The Implication: Prepare for higher delinquencies and chargeoffs as we head into a pre-recessionary environment. Use CECL requirements to your advantage to better identify loan portfolio risks, said Raddon.
Prediction: Consumer debt levels will flatten out.
Stating recent press coverage has exaggerated the risk of re-entering the debt crisis of 10 years ago, Raddon noted consumer loan growth since the start of this recovery in June 2009 has averaged 4.7% per year, which is fairly robust. “However, if you back out student loan debt, then consumer debt has risen by only 2.7% per year. Further, the number of households has grown since 2009 by slightly less than 1% per year,” Raddon said. “As a result, growth of non-student loan consumer debt has risen by less than 0.3% per year per household when adjusted for inflation. What this says is that other than student loans, consumers have not grown their consumer debt at any appreciable level.”
Raddon said it expects the trend to continue in 2019, with total consumer debt growing less than 4%.
The Implication: Student loans will continue to crowd out other types of consumer borrowing and hamper the financial status of Millennials and Gen Zs (and their parents). Continue to diversify your lending efforts and reduce your reliance on indirect lending, recommended Raddon.
Prediction: Consumer price levels will rise between 2%-3%.
Raddon is projecting consumer prices will rise at a faster pace this year, with increasing competition for labor driving up wages and this tends to have a ripple effect on general price levels.
The Implication: Be creative in how you attract and retain talent.
Prediction: Fed rate increases will be limited to one this year.
Noting the Fed continues to watch the two year – 10 year Treasury spread, Raddon said the Fed is unlikely move rates up if it causes the yield curve to invert. “However, we anticipate the economic conditions will stabilize, unemployment will remain very low and inflation will ratchet up. The result will be the Fed increases its target rate in the third quarter,” Raddon said.
The Implication: Examine the profitability of your loan portfolios and price accordingly. This may be the time to sacrifice some growth in order to improve the profitability of the loan portfolio.
Prediction: Mortgage activity for purchases will be more than 75% of total mortgage volume.
In 2012 over 70% of mortgage volume was refinance. By 2019, refinance activity was less than 30% of total volume, Raddon said. “Three factors are behind this change. First, rising interest rates have reduced or eliminated the economic value of refinancing for most consumers. Second, and related to the first, is that almost all who can refinance have done so. The third factor is the migration of the Millennials into their 30s, the traditional home-buying decade. The Millennial population is so large that it is impacting the purchase market in significant ways.
“We anticipate that purchase activity in 2019 will be higher than it has been in any year since 2006 and will be 2.5 times higher than it was at its nadir in 2011,” Raddon said. “We expect that purchase activity will account for more than three-quarters of all mortgage activity.”
The Implication: Make sure you have mortgage loan products that appeal to Millennials, and if you haven’t implemented a digital account opening system, put that high on your priority list.
Prediction: Net interest margins will decline due to higher cost of funds.
A major factor that has helped industry earnings in 2018 is improved net interest margin, but that will change in 2019, said Raddon. “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. At the same time, we are seemingly entering an era of deposit wars in many markets, with increasing levels of competition for deposits,” said Raddon. “Increasing generational wealth transfers will also impact deposit rates, as financial institutions compete more vigorously for these deposits which are at play. The depositor has awoken and the impact on cost of funds will be felt in 2019.”
The Implication: Cost of funds management will be more critical in 2019 than any year since 2006. Create a strategic focus around this area. Most institutions have a Chief Lending Officer; should you have a Chief Deposit Officer?
Prediction: Branch counts will decline by 2.5% to 3.0%.
Raddon said it expects the shrinking number of branches will continue as large banks shed physical locations. “They will continue to push the consumer on the digital path and by this reap the rewards of lower expenses and higher efficiencies. The increasing mobile-centricity of consumers will support this trend. Remaining branches will continue their migration from transaction hubs to sales and service centers,” Raddon said.
The Implication: Continue to rationalize your branch system. Do you have the right locations and the optimal branch designs? Do you have the right people in your branches doing the right things and measured with the right metrics?