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Market Commentary 11/15/2024

Posted on November 15, 2024 by Damon Germanides

Market Yields Rise As Fed Signals Pause

Market and Economic Insights

Bond yields have seen a significant rise in recent weeks, with traders assessing the impact of President Trump’s pro-business, pro-spending agenda on inflation and the broader economy. While a strong economy supports higher yields, concerns over tariffs and a focus on on-shoring U.S. manufacturing are inflationary. At the same time, plans to expand domestic oil and gas production could counterbalance inflation. Worries over the growing national deficit and ballooning debt continue to push yields upward.

Inflation and Cost of Living Concerns

We’ve expressed concerns about inflation risks previously, and they remain. The cost of living has surged over the past few years, leaving many Americans struggling to keep up with price increases. Despite economists’ claims of cooling inflation, everyday expenses have risen significantly as incomes lag. This disconnect leaves many feeling uneasy about their financial stability.

Fed’s Policy and Market Reactions

The Fed is signaling a halt to further rate cuts in December. Currently, Bloomberg places the odds of a cut at under 60%, down from over 85% just a few weeks ago. A booming equity market, tight credit spreads, and a surge in cryptocurrencies suggest that financial conditions may not be as restrictive as the Fed has assumed. With market optimism running high, a pause in December is likely the prudent choice, even if it’s not ideal for real estate. However, the worst-case scenario would be another Fed pivot leading to a rate hike, potentially destabilizing markets further.

Outlook for Real Estate

Despite higher rates, there’s a silver lining for residential real estate. Private banks are offering competitive rates and sacrificing margins to attract business. Additionally, non-QM products are priced favorably compared to traditional A-paper loans, providing flexibility for borrowers eager to buy or refinance without being penalized.

We are also seeing an uptick in our commercial borrowers seeking floating-rate loans in the hope that rates will slowly decrease, at which point they could lock in a longer-term loan. As short-term rates are priced off of either short-term Treasuries or SOFR, these rates have seen a nice reduction.

Market Commentary 11/08/2024

Posted on November 8, 2024 by Damon Germanides

Markets Reaction To Political Shift and Fed Actions

The change in political leadership led to a sharp increase in bonds and equities, despite bond yields dipping slightly after the Fed meeting on Thursday. The initial rise in interest rates reflected optimism around President-elect Trump’s economic plans, which prioritize domestic growth and potential tariffs, intensifying inflationary pressure. Equities surged the expectation that a pro-business administration would focus on restoring American manufacturing and deregulation. However, there’s a disconnect between business optimism and voter sentiment, as polls show many Americans are concerned about their financial futures and are frustrated by high inflation.

We assess that the economy is moving forward, but a significant portion of growth is driven by government spending. Many clients report that the cost of living, particularly essentials like food, insurance, and education, is too high relative to income, even for the affluent. Economic data is mixed, often complicated by low response rates in surveys, leading to substantial revisions. For those expecting a recession, the resilience of the US economy has been surprising. It is widely expected that the Trump administration will bolster economic confidence, reflected in rising bond yields, especially the 10-year Treasury.

The Fed lowered interest rates by ¼ point, yet the outlook for future rate cuts remains uncertain. Chair Powell acknowledged that while inflation has moderated, its cumulative impact continues to weigh on many Americans. Prices for goods and services are likely to stay steady or increase modestly, necessitating wage growth for Americans to feel financially secure. Lowering short-term rates benefits those using business credit or credit cards. Additionally, the normalization of the yield curve with short-term rates lower than long-term rates is advantageous for banks. This could widen the yield spread between short-term ARM loans and longer fixed-rate debt. The rising long end of the bond curve is putting pressure on lower-end borrowers who rely on government-backed loan programs. Yet, rates may rise less than expected should the margin tighten between mortgage rates over Treasuries. In addition, higher long rates are putting pressure on commercial projects. This is because the 10-year Treasury discounts the minimum return on such projects plus some margin.

Some Key Questions for the Coming Weeks:

If consumer and business confidence improves, will more prospective home buyers take the plunge into homeownership?
While long-term interest rates are likely to remain elevated, could a relaxation in banking regulations lead to more active lending? Will this shift in underwriting standards improve homeownership rates?
Will persistently high interest rates finally drive home prices down as sellers adjust to the end of a multi-decade bull market in bonds?
With government debt now at $35 trillion and rising, at what point will this debt burden start to significantly hinder economic growth?

Unlocking the Secrets of High-End Financing: Insights from Romy Nourafchan of Insignia Mortgage in Scotsman Guide

Posted on November 7, 2024 by victoria chuidian

Expertise is key to navigating a dynamic market and securing successful client outcomes in high-end financing. Insignia Mortgage’s seasoned loan officer, Romy Nourafchan, has shared his insights on this topic in an exclusive article for Scotsman Guide. In this piece, Romy dives deep into strategies for thriving as a high-end financing expert, offering valuable tips and perspectives for both industry professionals and investors. His expert advice provides a roadmap for making informed, strategic decisions that can lead to rewarding results.

Whether you’re looking to expand your knowledge or sharpen your skills in high-end real estate finance, Romy’s article is a must-read for staying ahead in today’s competitive environment. Discover actionable insights by reading the full article in the Scotsman Guide here.

Market Commentary 11/01/2024

Posted on November 1, 2024 by victoria chuidian

Bonds Yields Rise As Markets Brace for Election & Fed Meeting

Interest rates are on the rise as a weak Jobs report showed the addition of only 12,000 new jobs. Bond traders reacted unexpectedly to the news, with the market’s focus shifting to the growing U.S. deficit and the risk of persistent inflation. Of particular concern is the fact that neither presidential candidate has presented a plan to address the deficit, while the bond market appears to be signaling disapproval of continued government spending. With long-term Treasury yields rising since the Fed’s 50 basis point rate cut in September, we’re closely watching the 2-year Treasury as a proxy for next week’s Fed meeting. While a 25 basis point cut is anticipated, some experts suggest a pause might be more prudent, given the recent upward trend in rates and mixed economic signals

There’s an argument that current interest rates aren’t overly restrictive despite numerous factors like steady GDP growth, improved consumer confidence, a strong stock market, speculative crypto activity, tight underwriting, narrow bond spreads, and persistent wage inflation. For many individuals and businesses that secured historically low rates, recent rate fluctuations have had minimal impact. Additionally, with money market yields near 5% and rising housing and equity values, higher inflation may benefit wealthier Americans.

There may be an additional silver lining for real estate professionals. Many homeowners have held onto properties longer than planned, and home builders are running out of incentive options. If rates stabilize, home prices may need to adjust downward, which could entice prospective buyers off the sidelines.

Market Commentary 10/26/2024

Posted on October 26, 2024 by Damon Germanides

Mortgage Rates Edge Higher: What It Means for the Real Estate Market

Mortgage rates have edged higher as the economy remains resilient, while concerns over a potential rise in inflation linger. Consumer sentiment has improved, proving that the US consumer is tenacious, if nothing else. Nonetheless, credit card and auto loans have risen as consumers continue to feel the pressures of cumulative inflation. Housing activity, which is sensitive to interest rates, has started to stall as mortgage rates have moved up, causing prospective buyers to wait for a better entry point. Home builders are continuing to offer major incentives to buyers to move product and create buzz. If rates move further, we fully expect to see 2-1 buydowns and other incentives being mentioned in the Wall Street Journal as ways to attract prospective buyers. Lennar, a major home builder, recently disclosed that the buydowns and incentives combined amount up to $48,000 per home. That is a big number, especially since the average home Lennar sells costs $422,000.

There is still a silver lining, particularly for high-net-worth borrowers. Banks are still competing for top-tier clients, and those who qualify for private banking can secure loans in the mid-5% range. This is positive news for the luxury real estate market. Also, some smaller banks are looking at borrower financials more holistically and making commonsense decisions for borrowers with means. For first-time or lower-end borrowers, banks are offering very attractive terms to meet community lending requirements, including loans up to 100% financing with no points or mortgage insurance. These types of loans cap out at around $1M.

Some very respected Wall Street traders have opined as of late on the potential mistake the Fed made by cutting rates by 50 basis points. Their concern is centered around a good overall U.S. economy, low unemployment, and the return of animal spirits to the market as a result of the recent cut in interest rates. With US equities near or at all-time highs, Bitcoin and other speculative asset classes have soared. Credit spreads are tight and money seems abundant within the financial system. For those borrowers not in real estate or other industries heavily reliant on debt, there has been less pain than imagined from the initial Fed hikes. The big concern is if the Fed eases too quickly, that inflation will kick back up and they will be forced to raise interest rates again. This would be a very bad outcome for the respectability of the Federal Reserve. Next month brings both a Presidential election and a Fed meeting, both events that we will be watching closely.

Market Commentary 10/18/2024

Posted on October 18, 2024 by Damon Germanides

Mortgage Rates Higher As Economy Continues To Grow

Interest rates have settled in the 4%–4.10% range on the 10-year Treasury, as the economy continues to show steady momentum. Housing starts met expectations with a consistent pace in single-family homes and a decline in multi-family, while the market absorbs the significant supply that recently came online. The consumer remains resilient as the cumulative effects of inflation continue to be a pain point. Nonetheless, the US stock market continues an upward trend, seemingly unaffected by talk of slower Fed rate cuts, rising oil prices, and ongoing geopolitical concerns. Mortgage applications have decreased as the base rate for 30-year conforming mortgages has climbed back into the mid-6% range, amidst the rise in interest rates.

In mature markets like Los Angeles, which depend on existing home sales, there has been a noticeable slowdown since the mid-summer uptick. The luxury market is facing adjustments, with many high-end properties sitting on the market. As interest rates rise, sellers may feel increased pressure to lower prices. Regardless, there is a significant number of buyers waiting for a price correction to offset the higher financing costs and secure a better deal. We anticipate many potential buyers are waiting for the outcome of the upcoming election, which is now less than three weeks away.

While the recent spike in rates may cause hesitation, Insignia Mortgage is here to guide you through these market changes. Our high-end, non-QM lending solutions have been curated to meet to your specific needs. Case in point, some of our team’s most recent loan successes include 2 week closings and 98% LTVs.

Case Study: $10.5M Commercial Bank Funding

Posted on October 2, 2024 by Damon Germanides

Insignia Mortgage recently closed $10.5M Commercial Bank Funding. This case study showcases Insignia’s unique ability to get truly complex loans funded.

In this scenario, a sophisticated developer approached Insignia Mortgage for bank financing. The developer did not want funding from a private money source and was looking to develop a business relationship with a commercial bank. The property was financed with an initial loan for 70% of the purchase with a secondary vehicle customized by the bank for the construction improvements. A 24-month term was offered to allow ample time for improvements and the sale of the property. The developer returns significantly increased by lower cost of capital and optimized finance structure which lowered carry costs. Exceptional work by our Head of Construction Lending & Broker Associate, Todd William Harris.

At Insignia Mortgage, we understand that what works for one client does not always work for everyone. Especially when your financial picture doesn’t adhere to the strict model that many conforming lenders demand. Connect with us to learn more about our non-QM lending solutions.

Market Commentary 9/20/2024

Posted on September 20, 2024 by Damon Germanides

How Low Will The Fed Go?

Recent Conversations on Rate Movements

Mortgage rates have been trending lower in anticipation of a potential Fed cut. The implications of recent interest rate movements have been the focal point of recent discussions between Insignia Mortgage and our network of clients, real estate brokers, and bankers. Of critical concern is the actual short-term rate cut at the Fed’s forward guidance, commonly referred to as the “Dot Plot.” This guidance signals what Chairman Powell described as a “recalibration” of interest rates, with the median Fed Funds rate projected to decline to 3.375% by the end of 2025, down from 4.75% today.

Why the 50 Basis Point Cut?

The Fed’s dual mandate is a delicate balancing act to maintain stable prices and robust employment. With signs of a softening labor market, the Fed has determined that lowering rates is necessary to realign the economic environment. Prior to the meeting, there was significant debate over whether the cut should be 25 or 50 basis points. Supporters of the 50 basis point cut argued that a slowing economy warranted more aggressive action, while proponents of a smaller 25 basis point cut highlighted factors such as record-high stock market levels, persistent inflation, ample liquidity, and a still-healthy 4.2% unemployment rate.

A 50 basis point cut is uncommon, and as this decision takes hold, some are questioning what specific data may have driven the Fed to take this larger step. The issue is whether the Fed sees economic weaknesses that the broader market may not yet fully grasp. The economic data remains mixed, with some indicators surpassing expectations while others underperform. Be reminded should inflation pick up, the Fed will be quick to respond, especially if the markets overshoot on rate expectations and animal spirits take hold.

Impact on Mortgage Rates

As anticipated, interest rates have been trending down ahead of the Fed’s decision and mortgage rates have benefited. Currently, mortgage rates hover between 5% and 6%, with some high-net-worth clients securing rates below this range. Lower rates could stimulate homebuyer activity and potentially motivate sellers, many of whom have held off due to high financing costs, to finally list their properties. This would provide much-needed relief to the housing market, which has been constrained by limited supply, high prices, and elevated interest rates. After nearly two years of multi-decade highs in mortgage rates, this drop offers welcomed relief to both the residential and commercial real estate sectors—industries that are highly sensitive to rate fluctuations.

How Low Could Rates Go?

Looking ahead, mortgage rates may settle between 4.5% and 6.5%, depending on the length of the fixed-rate period. Borrowers seeking short-term floating or adjustable-rate mortgages could see rates below 5% in the coming months as the Fed continues to ease short-term rates. However, several headwinds could keep long-term rates higher than some might hope. These include a growing federal deficit, the substantial government debt burden, large-scale financial commitments to green the economy, and the significant investments needed for businesses to adopt and integrate artificial intelligence to remain competitive.

Insights On Inflation, Interest Rates And The Jobs Market

Posted on September 14, 2024 by Damon Germanides

Interest Rates: The Fed’s Delicate Balancing Act

Interest rates have moved lower over the past 60 days as the Federal Reserve pivots from focusing solely on inflation to taking stock of a slowing labor market. While inflation has eased, it’s important to note that prices aren’t falling – costs remain high, although they are not rising as quickly. This shift suggests the Fed might opt for a 25-basis point rate cut, the likelihood of a larger 50-basis point cut seems low due to recent signs of lingering inflationary pressures. While this gives the Fed room for a modest rate cut, it also serves as a reminder that inflationary pressures remain, and cutting rates too much could risk reversing the progress made so far in controlling price increases.

Slowing Labor Market

Labor market data points to a slowdown in hiring, which could signal weaker economic growth. These factors give the Fed a reason to consider a rate cut to avoid restricting economic activity. A 25-basis point cut would send a signal that the Fed is still supporting growth, without taking too aggressive an approach. A larger cut, however, risks overstimulating an economy still facing inflation concerns.

Wall Street vs. Main Street

While financial markets have remained highly liquid—evidenced by rising equity markets and strong demand for corporate debt—Main Street is still feeling the sting of higher borrowing costs. Consumers face elevated interest rates on mortgages, auto loans, and credit cards. This divergence between the health of financial markets and the struggles of everyday Americans puts the Fed in a tough spot. Cutting rates could ease pressure on consumers, but the question remains whether that relief is worth risking a potential uptick in inflation.

The Case for a Cautious Approach

In weighing its options, the Fed faces arguments both for and against cutting rates. On one hand, a rate cut would relieve some financial strain on consumers, especially those affected by higher borrowing costs. On the other hand, financial markets seem healthy enough without immediate intervention. Cutting too aggressively could undermine the gains made in controlling inflation, which is why a cautious 25-basis point cut seems the most likely move for now.

Case Study: $11M Private Debt Fund

Posted on September 6, 2024 by Damon Germanides

Insignia Mortgage recently closed a Private Debt Fund for $11 million. This case study showcases Insignia’s unique ability to get truly complex loans funded.

In this scenario, a high-profile borrower approached Insignia Mortgage to discretely locate $11 Million bridge loan to sell. The borrowing entity was a complex foreign trust, and the property involved as a condominium located in Manhattan, New York. Insignia Mortgage located a lender that gave the borrower the loan for 12 months, with a 12-month extension option, at 10.75% for an LTV of 30%.attain a more expensive loan. The loan closed in under 3 weeks with all of the moving pieces.