Blog - Insignia Mortgage

Market Commentary 11/12/21

Posted on November 12, 2021 by Admin

Consumers are starting to voice displeasure with inflation over important items such as food and gas, amongst many other costs. It is hard to say whether inflation will be transitory (the experts keep redefining what transitory means). Some goods such as used cars and lumber are falling in price, while other goods will come down in price as the supply chains open up. However, with a shrinking able work population, wage inflation is stickier and the cost of hiring employees is rising. You are hearing stories of businesses offering 20 per hour for entry-level jobs, as well as, investment banks offering over 300,000 for young investment banking associates who graduate near the top of their class. With rents rising and a tight housing market, it feels inflation will be with us longer than the Fed expected.

So why haven’t long bonds risen? Well, that is a tough question to answer. The Fed controls short-term rates by moving up or down the Fed Funds rate. Typically, longer-duration bonds are not controlled by the Fed. However, some bond analysts believe that the Fed is buying long-dated bonds which have kept rates lower than they should be. Others believe that the Fed will need to act quickly in raising short-term rates and in doing so, potentially harm the economic recovery. Therefore the next couple of monthly inflation readings will likely determine where interest rates move. It will be difficult to argue that inflation is transitory should the readings continue to come in “hot.” This week’s CPI readings were remarkable and at the highest since 1991. There has never been a time where inflation was running this hot and interest rates this low.

Real estate remains a great hedge against inflation, especially with such limited supply in the market. While prices can’t go up at this clip forever, historically low-interest rates are keeping affordability in the housing sector reasonable. Most people finance home purchases and are comfortable with the monthly debt payments. The growing number of non-traditional banks and mortgage companies are helping the higher-priced markets by accommodating borrowers with unique situations (those with hard-to-understand financials or originating from a foreign country). Insignia Mortgage remains very busy placing jumbo loans for these borrowers who are looking for a piece of the California dream.

Market Commentary 11/5/2021

Posted on November 5, 2021 by Admin

It was another strong week for the U.S. financial markets. The Fed remained dovish in tone but clear on their intention to proceed with caution on interest rate hikes. They are also gradually reducing their Treasury and mortgage bond purchases. The Jobs report showed strong gains. All this along with Pfizer’s wonderful news on a COVID anti-viral has pushed equities higher on Friday.

The 10-year Treasury yield dropped precipitously this week. The Bank of England helped yields move lower by not raising short-term rates. This has caught some off-guard, given the ongoing global pricing increases and supply chain disruptions. The combination of low rates and the end of the pandemic (we hope) along with bullish sentiment by investors support the Bull Thesis through the end of the year. Professional traders will have one eye on the exit while navigating to maximize profits in various markets. Inflation remains a problem (as admitted by the Fed) and could be the party spoiler sometime next year. The Fed may have to move more quickly than anticipated on the Fed funds rate. However, those bearish on rates and the economy have been dead wrong. For now, it’s a party mood on Wall Street.

While we have been of the opinion recently that interest rates will move higher, it is hard to comprehend how much liquidity has been pumped into the banking system by the Fed and other central bankers. This massive amount of liquidity has compressed interest rates and increased the value of risk assets. The housing market has been a big beneficiary of the low-interest-rate environment by allowing borrowers to buy bigger and more expensive homes.

Additionally, low rates on refinances have lowered housing expenses for many millions of borrowers. This allows more money to be used to consume goods. Housing purchase activity on the high end remains robust as many people well-to-do borrowers have benefited financially over the last year. As a result, the high-end housing market is experiencing record sale after record sale. Our complex jumbo loan solution with attractive terms remains in big demand for those borrowers with intricate financial statements.

Market Commentary 10/29/21

Posted on October 29, 2021 by Admin

The upcoming weeks are developing into an interesting time for the financial markets. While the argument can be made that all things are transitory, the Fed’s definition of transitory has been a few months. Core inflation is at a thirty-year high with no sign of abatement. Inflation appears likely to linger. Many of America’s best companies have commented about the supply chain and labor shortages. Numerous companies are offering several thousand dollars in signing bonuses to entry-level employees just to attract new hires. Other companies are addressing the employee shortage by finding their own logistics solutions to get goods to their customers.

Rising inflation is just not a U.S. issue. As the world recovers from the shock and reopening of COVID, the global supply chain has been broken. Some countries have seen enough of rising prices. The combination of surging demand with easy monetary and fiscal policy has created a massive amount of money in the global financial system.

To combat run-away inflation, some foreign central banks have begun raising short-term interest rates. It is not believed the U.S. is ready to raise interest rates, but the Fed has been signaling its intention of slowing the pace of purchases of bonds and mortgage-backed securities, a measure known as Quantitative Easing. By signaling the market of this intention, the Fed is hopeful the markets will take the news in stride. So far, so good. But there is no doubt that policymakers will be monitoring the markets very closely should the taper become official.

The Biden infrastructure, social welfare, and taxation plan are still not a done deal. Odds are that the plans will be implemented. There has not been enough time to adequately review the policy and how it might affect the U.S. financial and real estate markets. However, as we have opined previously, we don’t like the idea of increased taxes on capital gains on investments, especially if not inflation-adjusted. If taxes are raised too high on speculative investments, the desire to take risks will diminish.

The bond market remains sanguine on inflation but the yield curve has begun to flatten as future rate hikes seem more likely. As a result, slowed economic growth is probable. Remember, the Fed can control the short end of the curve but not the long end of the curve (unless the Fed implements yield curve control). Many banks price corporate bonds off of the 5-year Treasury so as this yield rises, so will corporate interest expense. With mortgage rates drifting higher, loan volume has slowed. This should come as no surprise. Alternative mortgage products are leading the charge for many of Insignia Mortgage’s clients. Many new home buyers and refinance applicants are not bankable with traditional lenders as many applicants have opaque financial structures. This segment of applicants tends to have hard to understand income, be from a foreign country, or are quite substantial from an asset standpoint. Real estate has been a great hedge against inflation historically. The combination of low-interest rates and rising real estate values continue to keep transaction activity high.

Market Commentary 10/22/21

Posted on October 22, 2021 by Admin

There is a growing sense that the U.S. markets are fully priced. That does not mean that U.S. equities, crypto, and real estate assets cannot go higher, or that bond yields will immediately shoot up. The Fed is making it clear in its messaging that inflation is becoming more of a concern, and that it’s time to begin reducing the extraordinary monetary stimulus that served the U.S. economy well during the Covid pandemic. Many economists believe that the Fed will announce tapering at the next Fed meeting in November.

By back-stopping the bond market and including BBB-rated bonds, there’s no dispute the Fed’s actions have created inflation. This includes the act of pumping the printing press with transfer payments in a way never before imagined in response to a once in a 100-year pandemic. The big question is determining how the world has changed post-Covid and if we’re entering a new period of sustained inflation. With help-wanted signs everywhere and companies of all sizes paying up for employees, it is starting to feel as if there is a changing dynamic within the workforce. Surprisingly, employees are not being lured in by these higher wages. Perhaps this is due to the incredible rise in home valuation, or in part by how much money has been made trading stocks and crypto. With the pandemic waning, the next few months of economic data will be closely be monitored to determine if employment rates drop as Federal stimulus payments end and Americans continue to get vaccinated; or if something else is at work. Consumer inflation is also at near 30-year highs. We continue to be told that bottlenecks and supply chains are the cause of rising costs but this theory is losing steam as inflation holds firm.

Home sales remain very active and borrowers remain well qualified. The pace of transactions has slowed a bit, but that may be good for the market and bring in more sellers. Mortgage banks are providing attractive financing options for larger-sized purchases, especially for those borrowers with hard to analyze income. Refinance volume is slowing as expected. It may be a now or never for those borrowers looking to lock in ultra-low interest rates as the 10 year U.S. Treasury touched above 1.700% on Friday before settling in a bit lower. With inflation running hot and the Fed exiting the bond purchase market, bond traders will begin demanding higher yields.

Market Commentary 10/15/21

Posted on October 15, 2021 by Admin

Banks kicked off earning season with the major banks reporting positive growth, inspiring the equity markets to move higher. Although inflation is becoming a bigger concern, the market has momentarily put those worries to the side. Interest rates have drifted lower, which is perplexing, as the cost of all goods (food, gas, rent, materials) show no signs of lowering. Supply chains and lack of available workers are delaying the delivery of goods and also increasing costs. Companies are having to pay up for workers and there is some worry that the Fed is being pushed into a corner it will not easily be able to get out of unless it restricts monetary policy in a way that could upset markets. Should the bond market change its feeling about inflation, interest rates will move up quickly. One cannot underestimate the Fed’s ability to buy up the market, impose interest curve controls or other measures to contain interest rate volatility. However, while Fed policy is effective in creating demand, very low rates may actually be creating more demand than the supply side can handle. With no lack of demand in the U.S. for goods and with 11 million job openings, one has to wonder if we have reached the limits of what monetary policy is capable of. There seems to be more money chasing fewer goods (think autos, homes, washing machines, etc) and an increased threat of structural inflation.

China’s property market is of some concern as several trillion dollars of real estate corporate debt are at risk. Most don’t think what is happening in China will have a negative impact on the U.S., but some worry is warranted given the size of the Chinese property market, the size of the leverage, and the unforeseen risks associated with a drawdown on the largest property market in the world may have on the global economy.

Some parts of the U.S. are starting to see a slowdown in home sales. Interest rates are still cheap so that is definitely a major factor for those who are actively looking to buy a new home. The rise in home prices has been dramatic over the last 18 months, and while there is concern about a market top, ultra-low interest rates have kept affordability at reasonable levels. Also, real estate has served as an excellent hedge against inflation historically with investment properties offering some excellent tax write-offs that help to lower ordinary income. One of many reasons that make California the leading residential real estate market is the diversity of businesses within the state. While an expensive state to operate in, it provides many entrepreneurs with such great opportunities. This is reflected in the housing market and many of the mega-homes sales that we read about weekly. Insignia Mortgage is honored to be part of many of these large sales as our expertise in structuring complex loans is a perfect fit in this type of market.

Desk chair in the light - October 8 2021 blog image

Market Commentary 10/8/21

Posted on October 8, 2021 by Damon Germanides

Today’s poor jobs report was a surprise as Covid cases have been declining for the last few weeks. There is a strange dichotomy that has developed in the U.S. labor market. There are over 11 million job openings, yet there has been a continuous decline in the working population. The Labor Force Participation Rate (LFPR) fell to 61.6% as 183,000 people left the labor force. Businesses across the county are offering higher starting salaries and cash perks to attract workers. Higher up the pay scale, policies such as work from home and flexible work schedules with higher wages seem to favor the employee, yet all types of businesses are struggling to fill open positions.

The combination of wage inflation and goods inflation remains top of mind for many economists, along with the fear of a slowing economy and rising costs. With major supply chain disruptions, as well as a lack of workers, the busy fall buying season is shaping up to be one for the ages. Cargo ships at the Port of Los Angeles and Long Beach are backed up for weeks. Dry shipping costs are outrageously expensive. Companies that can pass on the rise in the costs of goods and labor will do so. The big concern is that even with rising wage inflation if the prices of goods go up more than the increase in wages it is still a net loss for lower-paid workers. The massive disruption by Covid will take many months to work itself out and the cost to the consumer is higher prices.

Support for the transitory argument on inflation by the Fed is beginning to wane as the 10-year U.S. Treasury bond is trading above 1.60%. For the moment, the equity market is agnostic to this move higher in bond yields, but should this trend continue, volatility will pick up, especially with high-beta long-duration technology stocks. Rising rates may also cool the red-hot housing market. Even with the rise in housing prices in the last 18 months, ultra-low interest rates have kept payments reasonable and therefore have offset the expensive housing market. With a high probability that the Fed will need to begin tapering its bond purchases by the end of this year, rates could move up meaningfully. Absent Fed QE, time will tell what the market will require for bond and mortgage yields to catch a bid and how other markets will be affected if interest rates drift higher.

Market Commentary 10/1/21

Posted on October 1, 2021 by Damon Germanides

It was another volatile week on Wall Street as bond yields drifted higher and then fell. Inflation remains elevated and Covid-19 continues to wreak havoc on the supply chain and logistical delivery of goods which is a big deal given a great majority of the U.S. economy is consumer-driven.

There was some very good news on the pandemic this morning as Merck announced very positive results from its oral antiviral treatment for Covid. Perhaps the threat of Covid will soon be behind us we all look forward to a return to a more normal way of life.

Congress is grappling with two major spending bills: one aimed at infrastructure and the other focused on societal benefits. Both packages are enormous and should be carefully thought out. The debt-to-GDP ratio is already highly elevated. Each side of the aisle bears responsibility for spending through the years, but now, we are talking about trillions upon trillions of dollars of debt. It will be interesting to see how the bond market responds to the bill’s (or bills’) passage. For now, bond traders have not been bothered about these proposals, and some might argue the way bonds are responding, these bills may not pass or they may end up quite diluted.

Core inflation came in at over a 25-year high this morning. Fed Chairman Powell spoke about his frustration with the ongoing inflation problem but reiterated that the Fed believes inflation will temper in the coming months as the supply chain issues are smoothed out. While we certainly hope inflation does not run hotter for longer, there are some signs that inflation is not going away anytime soon. Once businesses raise prices, these prices remain intact absent a major recession. Also, wage inflation is trending nationwide as many businesses have raised their minimum wages and even offering signing bonuses to attract employees. Powell has the confidence of bond traders still or yields would have spiked this morning after this inflation report came out.

The alternative mortgage market remains very busy. As a leading broker of niche mortgage products in California, we are helping many self-employed borrowers, foreign buyers, and real estate investors obtain financing with attractive interest rates and terms. Our new CDFI program, which does not require a borrower to provide income or employment records, has been especially helpful. These loan amounts are good for up to $3 million and interest rates start in the low 4-percent range for interest-only.

Market Commentary 9/24/21

Posted on September 24, 2021 by Damon Germanides

Equity markets surged after heavy selling of stocks on Monday even as bond yields rose and the 10-year Treasury touched above 1.450%. The “buy the dip” has proven to be a profitable strategy during this recovery, but, rising bond yields may limit gains. The Federal Reserve will soon begin to taper its asset purchases. For the interim, the Fed gave the all-clear on both asset purchases and on raising short term rates and risk-on assets such as equities responded favorably to the messaging from the Fed. However, the move up in bond yields should not be discounted. Interest rates are rising in all developed nations including the U.S.

Last night, Costco and Nike reported earnings, highlighting the impact of logistic, supply chain, and inventory challenges. All of these issues are inflationary and are proving not to be as temporary as the Fed has stated in the past.

How does this all affect housing? Higher bond yields plus inflation, if persistent, will slow down the housing market as homes are expensive nationwide. Potential buyers are justifying paying more by locking in historically low-interest rates. Inflation readings, which may move even higher over the coming months, could dent consumer and business sentiment. A lot will depend on how the Fed navigates monetary policy in the coming months. Major housing supply issues have provided high support levels for home prices. If rates move up to much this will affect the ability of homeowners to qualify for mortgages.

In summary, we see many headwinds to the ongoing economic expansion even as the equity market parties on. Caution remains warranted and for our borrowers, that means locking in interest rates at still very attractive levels.

Market Commentary 9/17/21

Posted on September 17, 2021 by Damon Germanides

Bond yields are under some pressure this week as the equities markets trade with renewed volatility and investors become more cautious. We also saw a mixed bag of economic reporting with some manufacturing data and retail sales coming in better than expected. Inflation remains a global concern and while the Fed remains in the transitory camp. For the moment, there is no denying that the cost of living has increased. Landlords are raising rents, costs of goods and services have surged, and while income has risen it is not keeping up with inflation for the average wage earner. The 10-year Treasury breached its 200-day moving average for the first time in many months. Fears of inflation and of the even more worrisome stagflation (slowing growth and high employment) are the topic of anxious conversation. Compounding matters are the 4 million people who have decided to leave the workforce permanently due to the Covid epidemic while help wanted signs are omnipresent and companies struggle to fill positions.

The markets are also digesting the administration’s new tax proposal which is focused on increasing tax rates on those who earn over $400,000. This new proposal will also increase tax on capital gains and place limits on how retirement savings, affecting primarily upper-income workers. Overall, I believe this plan is a negative for the equity and real estate markets as higher taxes mean less available funds would be freed up for investing in stocks and buying real estate. The impact will be felt especially in very expensive coastal cities.

On the housing front, San Francisco and other California cities are experiencing a surge in homes for sale. High home prices and high demand are encouraging sellers to list properties, a boon for prospective buyers. We will see if it continues. If yields move up, more supply will be needed to cool off buying frenzies. Tight home supply remains a major issue as the Covid pandemic has triggered supply chain issues and delays in home construction.

The market could be impacted by a recent development we noticed in the margins. A large Chinese development firm, Evergrande, has defaulted on billions of dollars of debt. While this will have little effect in the U.S., it could ripple out to multi-national banks that lent billions Evergrande. It is also a reminder of the consequences of what may happen when companies lever up to unreasonable levels and banks permit this to generate fees. Whether this is the first of many overleveraged Chinese developers to default is yet to be seen, but this story reminds me of what happened in the U.S. with Lehman Brothers, which started off as an isolated incident and quickly devolved into the Great Financial Crisis of our time.

Market Commentary 9/10/21

Posted on September 10, 2021 by Damon Germanides

We continue to remember the many souls who perished on 9/11.

Wholesale inflation continues to run hot but an easing of month-over-month increases supports the idea that inflationary pressures may prove transitory. However, transitory remains a moving target on the inflation debate as all of us continue to witness ongoing rises in prices in wages and commodities. These price pressures are pinching the wallets of middle and lower-income wage earners in a way that we have not seen for a long time. While we think some parts of inflation will recede, that may not be true for inflation as a whole. There could be far-reaching negative implications for the economy if the Fed is wrong in its view on inflation.

Interest rates have risen but for the moment appear range-bound. The 10-year U.S. treasury has bounced around from the high 1.2s to mid 1.3s. Equities had a bad week with no huge down days, but it was a slow daily drawdown and poor overall breadth.

The big question is what will propel equities higher or encourage people to buy real estate? Are low interest rates and the threat of inflation enough of a draw to lure in buyers at these prices? Caution seems warranted for now due to multiple factors: we’re heading into fall; Congress is working through the debt ceiling and trillion-dollar stimulus packages which will add to the national debt in a way few could have imagined a few years ago.

We are starting to see choppy income from self-employed borrowers as they attempt to refinance or buy homes. This is a direct result of the damage done by Covid. This is making underwriting loans more difficult. Thankfully, Insignia works with lending partners who are willing to read between the lines or make judgment calls based on information beyond one poor tax filing.