Blog - Insignia Mortgage

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.

Market Commentary 9/3/21

Posted on September 3, 2021 by Damon Germanides

Friday’s August 2021 job report was a big miss. The consensus was that 750,000 new jobs were expected but the number was woefully lower. Bond yields initially fell, but then rose as inside the report it was noted that wages increased faster than expected in a sign that structural inflation is ramping up faster than forecasters have predicted. If wage growth at this level is sustained, it could lead to a further rise of costs of goods and services. The Delta variant specifically hurt the travel and leisure industry as there were no job increases in this sector. The unemployment rate did fall to 5.20% but remember that number only counts people actively seeking work.

The big question facing the Fed in the coming months is whether it is justified to continue to purchase $120 billion per month in Treasury and MBS bonds. Massive Fed stimulus has had direct positive impacts on financial assets including equities and homes prices. However, as home prices surge around the country, some are beginning to wonder if this program is still needed as the pinch of inflation is beginning to be felt by low-end workers the most. These workers see no benefit from low rates as they are not invested in the market and most are not homeowners.

Our feeling is the Fed will probably taper, but not next month. Bill Gross, the former bond king, sees the 10-year moving up to 2.000% next year. Even some Fed members have opined on the need to scale back bond-buying as this program was not designed to assist supply-side issues in the economy. Employers all over the country are looking for workers and goods and service prices are rising as supply chain issues delay or limit how much of these goods and services can be made and shipped. Some are also beginning to worry from afar about stagflation, the combination of a slowing workforce and rising prices.

Keep an eye out for Fed speak, increased volatility in the equities market, and the direction of the 10-year bond in the coming weeks. As we enter a historically volatile part of the year for the markets, the added concerns over Fed policy could make for some tough days ahead. However, one must keep in perspective the incredible run in equities and housing over the last year and a half should markets move lower.

Product Highlight: As housing has gotten more expensive, lenders have come up with more inclusionary loan programs, including CDFI lending, which does not consider tax returns as part of the loan approval process. These loans are priced higher than traditional loans and requiring a 25% down payment have become very attractive products for self-employed borrowers. The lender offers loans up to $3 million. Interest-only options are available. Contact us to learn more.

Market Commentary 8/27/21

Posted on August 27, 2021 by Damon Germanides

The markets shrugged off the chaotic situation in Afghanistan as many Americans were left with heavy hearts after yesterday’s events. Years ago this type of event would have had a big impact on the markets, but as the world has changed so have the manner in which these awful developments are digested by the markets.

However, all eyes were on the Jackson Hole virtual summit this morning and the Fed did not disappoint. A dovish Fed speech by chairman Jerome Powell eased bond pressures and helped lift stocks on Friday. While the Fed will most likely begin to taper its bond and mortgage-backed security purchases later in the year, but Chairman Powell’s comments remain extremely dovish. With full employment still far off, an increase in Covid cases, and a slow down in consumer spending, Powell did his best to not spook the markets. However, inflation is everywhere. The Fed’s favorite inflation indicator, the PCE, came in a touch lower, but still at 30-year highs. As we have discussed previously, certain costs such as lumber (which has retreated significantly from peaks), used cars, and micro-processors will prove to be transitory, but other costs such as wages and housing costs will prove to be stickier. The Fed’s goal of encouraging inflation with a focus on wage inflation only makes sense if core goods and services don’t inflate more than inflation. This is what the Fed is betting on and only time will tell if it will be a good or bad policy decision.

For the moment, the bond market is on the side of the Fed. This is encouraging the flight of capital to fixed assets such as equities and real estate. One famed bond manager stated that equities are expensive but a better investment than bonds. Low bond yields have helped consumers and corporations alike lower their debt burden, raise cash cheaply, or buy assets with attractive debt. All this has helped our economy recover very quickly from a once-in-a-lifetime pandemic. The markets are richly valued and while caution is warranted, animal spirits are alive and well.

Non-traditional mortgage products are dominating the news as the pool of traditional borrowers have had a long period of time to refinance into very low-interest rates, and buyers are stretching as home prices have soared. At Insignia Mortgage, we are seeing great demand for these products at the moment, especially amongst the self-employed whose income can be choppy and the bulk of their owned assets may be held inside corporations or other entities.

Market Commentary 8/20/21

Posted on August 20, 2021 by Damon Germanides

Bonds Market Eyes On Jackson Hole For Direction On Interest Rates

It was a dramatic week of market swings, surging covid hospitalizations, international conflict, and conflicting messaging by the Fed on the course of monetary policy. The equity markets were very choppy and a look at the averages was not representative of the draw-down many equities experienced this week. Volatility rose, retail sales softened, and the prospect of continued QE increased as the Delta variant continues to create havoc. While a full shutdown of our economy is unlikely, the virus is slowing down certain sectors of the economy. Economists have lowered GDP estimates and consumer sentiment has waned. Many analysts believe the next few months could see volatility rise as the modern world struggles to normalize around Covid. Homebuilders’ sentiment also dropped. How long the Fed can be ultra-accommodative? Inflationary pressures have squeezed margins on everything and as a result, we’re seeing increased pricing across the country. Housing prices are at peak levels and are outpacing income growth.

All eyes will be on the Jackson Hole economic symposium next week in Wyoming when Fed chair Jerome Powell takes the stage to speak on monetary policy. There have been fairly strong sentiments supporting the reduction of QE support of our economy. However, the combination of a poor sentiment reading, international tension, and advancing Covid infections may conspire to reshape the Fed’s view to wait longer. The downside of waiting is inflation. While the inflation readings do show some signs of inflation leveling off, most Americans across the country are feeling the pinch. Small businesses are also hurting as wage inflation eats into profits.

On the mortgage front, the volume has moved to more niche products. Interest rates have been at near historically low levels for over 19 months, and by now many Americans have either purchased or refinance their homes. This has shifted the focus of loan origination to more complex, non-traditional lending. This aligns well with Insignia Mortgage’s expertise working with specialized local lenders, boutique banks, and credit unions to provide these types of complex loan packages for our clients.

Market Commentary 8/13/21

Posted on August 13, 2021 by Damon Germanides

Consumer Sentiment Dims As Rates Push Lower To End The Week

Interest rates dipped on a surprisingly negative consumer sentiment report which was the worst reading since 2011. The report was a surprise given the strength of the economy over the past many months and considering the positive trends in inflation, individual finances, and employment. Earlier this week, reports of tapering inflation were welcomed news to the stock and bond market. However, producer prices ran hotter than expected, so the direction for inflation remains a bit unknown.

Fed members have started talking about initiating bond tapering as we see improvements in employment, increased housing prices, and stronger personal finances. Some voting Fed members are pushing for a tightening of asset purchases in September. However, Fed Chair Powell has been adamant that he wants to run the economy hot for longer even with robust GDP growth and the highest inflation readings in years. A cross-current of thinking abounds on where we go from here, but a careful eye must be kept on the bond market in the coming weeks for signals on the overall health of the consumer and potential supply chain disruptions due to the Delta variant and impacts on retail in the US and globally.

Market Commentary 8/6/21

Posted on August 6, 2021 by Damon Germanides

Rates Rise on Strong June Employment Report

Interest rates moved higher on a strong June jobs report. The report caught some on Wall Street off-guard as the U.S. economy continues to improve in the face of the covid pandemic. However, the rising cases due to the Delta variant do present some challenges in the coming months. While mass shutdowns seem unlikely, anything can happen as the world struggles with this new more contagious variant. For the moment, Mr. Market appears to believe that the virus will not cause major economic harm (we sure hope so) and that the road to normalcy remains on track.

Hedge funds have gotten creamed trying to short the bond market. The dip in bonds last week is partially attributable to a large hedge fund covering a major short position. This depressed rates even further momentarily which made prompted concerns of something more ominous afoot. Rates have since risen from those low levels of last week and increased this week. We’re still a ways off from a 2.00% 10-year Treasury, but bonds seem to be headed modestly higher. Inflation readings in the U.S. and there is support abroad for the idea of some structural inflation, especially with wages. Persistent supply chain issues continue to push up delivery and logistic costs.

Housing seems to be slowing a bit as the end of summer approaches and the new school session approaches. Given the torrid pace of purchases over the last year and the prices increases, this comes as no surprise. Lenders remain eager and willing to lend. There are now a myriad of ways to qualify borrowers beyond traditional banks. This bodes well for the broker business, especially in California, where we have a large group of borrowers who don’t fit into traditional lending products.

Market Commentary 7/30/21

Posted on July 30, 2021 by Damon Germanides

Rates Lower On Covid Delta Fears

It was a big week for the markets. Big tech reported mixed results. While the earnings were strong overall, Facebook and Amazon warned of slowing growth. Bonds fell on Friday due to fears of economic slowdowns that may result from the rapidly spreading Delta variant. Also helping push yields lower was a better than expected inflation reading on the Fed’s favorite inflation gauge, the PCE (personal consumption expenditures). GDP grew at a strong clip, but below expectations. The combination of a lower than expected inflation reading and a slowing economy will provide some cover for the Fed to keep rates lower for longer although Fed officials are slowly warming up the markets for an eventual reduction in the ultra-accommodative monetary policies.

A bipartisan infrastructure plan will help spur more growth in the U.S. economy. It is a welcome upgrade to our infrastructure and will provide high-paying jobs throughout the country while not raising taxes.

Should the Delta variant prove to be a temporary setback, bond yields should drift higher over the coming months and therefore it remains prudent for clients to look to lock-in mortgage rates now versus waiting for lower rates in the future. The UK data is encouraging as new Covid infections are falling sooner than expected. While the virus remains an enigma, similar vaccination rates suggest that the course of the virus may follow the UK path. We sure hope so.

Market Commentary 7/23/21

Posted on July 23, 2021 by Damon Germanides

Bond Markets Await Big Inflation Reading Next Week

Equity markets started the week with a big downdraft but have rebounded to new highs. Bonds dipped and then rebounded. This all supports the notion that we should expect to see more volatility in the coming months. While equity markets appear fully priced, the bond market’s paltry yields will continue to support riskier behavior. This will bode well for equities and alternative assets including real estate and private equity.

Central banks continue to reinforce low rates for longer as the Delta variant spreads and creates more uncertainty about the pandemic and how it will affect the reopening of the world’s economy.

Next week will be an important one as the Fed’s favorite inflation indicator, the core PCE, reports for June. Inflation is front-page news and the debates are ongoing about whether inflation is transitory or sticky. It will be interesting to see the responses from both sides on the current state of inflation. Bond yields will be on edge as it awaits this critical report.

Mortgage rates have held up well during this time. While it is hard to argue for lower interest rates as the economy improves, the Delta variant has increased the risk of a market setback which has helped keep interest rates low.

Market Commentary 7/16/21

Posted on July 16, 2021 by Admin

Refinances Surge As Bond Yields Drop

Bond rates continue to dip even as inflation readings run hotter than expected. It is true that some inflation appears to be transitory as evidenced by the expected drop in used car prices and the dramatic fall in lumber costs. However, other costs such as wage inflation are stickier and probably here to stay. Finally, housing costs, which have yet to fully appear in inflation readings yet, will begin to affect the report in a bigger way and should keep inflation readings elevated.

Another factor to consider is that the global central banks have pumped unprecedented amounts of liquidity into the market which has distorted all price discovery, including bond prices. Also, the U.S. interest rates remain some of the highest in the developed world. It is ironic that a country such as Greece has lower bond yields than the U.S. while being a much worse credit risk. Should the markets become untethered from the Fed’s belief in inflation being transitory, rates will move up quickly. The next couple of months will be very interesting and could lead to much more volatile markets. Potential borrowers who have not taken advantage of these ultra-low interest rates should do so while the window is still open. It is hard to imagine with such strong economic growth that the Fed keeps short-term rates pegged at zero for as long as originally projected.

As we move into the middle of summer, purchase and refinance applications remain robust. Low-interest rates continue to drive purchase-money business, but there appears to be a pause in-home price increases as we have seen a very healthy increase over the past year that is not sustainable. Lenders remain eager to lend and non-QM programs are helping borrowers who do not fit inside traditional banks.