LOMBARD, Ill.—It’s time for credit unions to keep their eyes on Millennial homebuyers, savings from older Americans, and core deposits.
According to Bill Handel, vice president of research for Raddon Financial Group, those three areas will be keys for CUs as the U.S. economy heads toward what experts predict will be a rising-rate environment later this year.
Handle said the “clear” impact from rising rates will be on mortgage originations, which have already slowed, and on refis.
“I think this will finally close the door on the refi boom,” he predicted.
Those changes make it imperative that credit unions begin to target the “trade-up” homebuyer to keep the mortgage pipeline moving, as well as first-time homebuyers—of which the large majority are Millennials.
Millennials Replacing Boomers
“Millennials are replacing Baby Boomers in the economy and their impact is just being felt economically,” said Handel. “This is really true in the financial services space and in the area of real estate.”
Handel said the typical target for first-time homebuyers has been 31-year-olds. But with the large amount of student debt—and overall debt—held by Millennials, that target age may be pushed to 32 to 33 years old now.
“Millennials’ impact in the real estate area will be much more pronounced in the next five years and it is important for credit unions to get in front of that,” said Handel. “Credit unions should have a strategy for attracting Millennial first-time homebuyers, and that should be centered around literacy and education on the mortgage process.”
Bill Handel, Raddon
But the bigger concern raised by rising rates will be with deposits, predicted Handel. With rock-bottom rates being in place for more than four years, many consumers have simply given up on finding a worthwhile rate and are parking money in core balances, he said.
As CUToday.info previously reported, that issue is a big concern for financial institutions as large chunks of core balances, considered stable money, could begin to flow out. Handle agreed.
“The past five years have dramatically changed the deposit base,” said Handel. “We now have the highest percentage of deposits sitting in core balances in modern credit union history. When rates rise, these members will immediately begin looking for rate either inside or outside the credit union.”
Time To Strategize
That’s why CUs should start now forming strategies not only to retain these balances, but also find ways to attract new deposits, said Handel. “And they need to monitor the behavior in core deposits as soon as rates rise.”
Handle said that credit unions swimming in liquidity can wait to see what happens with these balances as rates rise. “But for those with a high-loan-to-share ratio, I might be starting now to do something.”
Seniors are another depositor segment to watch,” advised Handel, who described those depositors as the most “penalized” by the low-rate environment.
“These are people who depend on their investments and they have had to bear low rates for an extraordinarily long period of time,” he said. “So when rates begin to rise there may be heightened sensitivity from this group to the uptick. They may begin to aggressively look for their best options. This is just another reason why when rates rise this time (compared with previous economic cycles) we may see more hot money than we have in the past.”