Blog - Insignia Mortgage

Market Commentary 6/25/21

Posted on June 25, 2021 by Damon Germanides

Core Inflation Readings Push Yields Up
Core inflation came in hot, but not hotter than expected. Bonds reacted by pushing yields above up. However, within the report, spending slowed a bit in May and incomes flattened. A slowing in spending is good for the Fed. It will also allow them to continue to print money and prevent them from lifting rates quickly. However, assuming that pandemic-related illness rates in the U.S. continue to decline, the Fed will need to pull back on some of the extraordinary policies that were enacted to combat Covid’s impact on the economy.

Equities have responded well to the Fed’s messaging. A new infrastructure plan will create another boost to the economy and will create good new job opportunities.

Rising housing prices are beginning to create issues for borrowers, especially in the lower-income tiers, as the combination of rising prices and higher interest rates affect home affordability. If rates do move higher, housing prices will need to adjust.

Interest rates remain low but could move up sooner than expected if inflation is deemed more structural and less transitory by investors and economists. We continue to advise clients to take advantage of these ultra-accommodative interest rates and to lock in long-term financing as a hedge against inflation.

Market Commentary 6/18/21

Posted on June 18, 2021 by Damon Germanides

Fed Talks Of Tapering Drives Rates Lower – Go Figure

The Fed’s shift in policy acknowledged inflation is running hotter than expected. They also confirmed that the tapering of the Covid emergency policy responses was met with big inter-week swings in interest rates and increased volatility in equities. We will see if this change in Fed policy will create the so-called “Taper Tantrum” that we witnessed the last time the Fed tried to unwind its ultra-easy fiscal policies. However, with the 10-year Treasury around 1.500%, interest rates are still very attractive. This ultra-low interest rate environment has encouraged prospective buyers of all assets (stocks, real estate, crypto) to take on more risk either by buying real estate at elevated prices, purchasing stocks over bonds, or hedging dollar depreciation by buying alternative assets.

A lack of housing supply continues to nudge prices higher. However, affordability is becoming a big problem. If interest rates move up, there will need to be an adjustment in the supply and demand equation, and home prices will be under pressure. We are starting to see appraisals unable to come in at value on certain purchases. With the pandemic waning, perhaps buyers will not be so eager to stay in escrow, especially if the home does not appraise.

Non-QM or alternative lending is really picking up steam. Lenders are pushing products out to the non-traditional borrower in a manner I have not seen in many years. Thankfully, lenders are keeping the loan to values reasonable so borrowers still have real skin in the game. Loans to foreign nationals, no income verification loans, and asset-based loans are all back with a vengeance. Insignia is placing loans with many lenders and are closing transaction up to $15 MM with very low-interest rates and interest only. The search for yield is driving the products and it will be interesting to see what happens if interest rates rise.

Market Commentary 6/11/21

Posted on June 11, 2021 by Damon Germanides

Mortgage Rates Lower Surprisingly As Inflation Picks Up

It’s hard to make heads or tails as to why bond rates have fallen as of late in response to very hot inflation readings. Bond yields have been driven lower, helped in part by central bankers championing ultra-easy monetary policy and longer QE. The old adage that the cure for inflating input costs and consumer goods is even higher costs, which may have peaked in May. This idea has considerable support and it has become part of the Fed’s transitory inflation thesis. However, the Fed is seeing its desired response on wage inflation take hold (higher wages), but higher wages are not transitory. Once an employer raises wages, it is nearly impossible to reduce them later. The hope is that wage inflation sticks around and goods inflation recedes. The risk is a return to an inflationary world or even worse, stagflation. We are watching unprecedented fiscal and monetary intervention in real-time on a global scale which could have unintended consequences.

Given the dip in interest rates, there seems to be little room for rates to move lower. With CPI data running at 5.00% year over year, real interest rates are running negative. At the important Fed meeting next week, Fed Chairman Powell will need to provide clarity as to why an improving economy with over 9 million available jobs, needs more stimulus and why interest rates should be prevented from normalizing. We are certainly in crazy times.

With the 10-year Treasury note near 1.500%, many strategists are firming up their belief that now is the time to refinance your mortgage. If prices in your zip code have risen, low rates may still make it worthwhile to buy a new home. We recommend locking in longer-duration mortgages because if trends shift direction, then higher mortgage rates could be here for quite a while.

Market Commentary 6/4/21

Posted on June 4, 2021 by Damon Germanides

Good But Not Great Jobs Report Pushes Mortgage Rates Lower

Interest rates rallied as the May jobs report was a good one but not quite what the forecasters predicted. Weekly unemployment data improved as the United States continues to recover from the pandemic. Fed commentary about the May jobs report reinforced that ultra-accommodative policy will keep pace until the Fed’s goal of full employment is met. The jobs report supports that thesis for the moment. The unemployment rate clocked in at 5.80% with still nearly 8 million jobs to fill.

We have often commented that the Fed is encouraging inflation which is now making its way through the economy as both wages and goods have risen. It is hard to argue that wages are transitory as wage increases are sticky, but some goods and service price increases could fall as supply and demand rebalance, and for the moment the bond market and the Fed appear to be in agreement that inflation will not be a problem. Yet, CPI and other inflation readings indicated that costs have soared, a burden for everyday Americans. If inflation is feistier than expected, rates will move up quickly as a countermeasure.

Traditional loan volume is ebbing as many borrowers have either purchased or refinanced their homes by now. However, alternative sources of real estate financing with attractive terms are helping borrowers who have complex financials, nuanced income, less than perfect credit, or other non-traditional circumstances. Insignia Mortgage continues to see strong demand for loans, especially in this niche area of the market. Finally, we continue to encourage former and current borrowers to take advantage of these very low rates because nothing lasts forever.

Market Commentary 5/28/21

Posted on May 28, 2021 by Damon Germanides

Mortgage Rates Stay Low As Inflation Debate Heats Up

The Fed’s favorite inflation reading, Core PCE, rose the most since 1960 and clocked in at 3.10% annually for April. This came as no surprise as everyone is seeing what inflation looks like when they pay their bills at the end of each month. The bond market waived off the report as no big deal as bond yields are lower in light trading. Perhaps the White House’s $6 trillion budget proposal and all the new taxation associated with it is keeping bond traders calm. Higher taxes will curtail spending on goods and services which will lower demand and in theory, could prove the Fed right that inflation is transitory. However, there is cause for concern as businesses, especially smaller businesses, can only absorb so much in added cost before being forced to raise prices. Also, the spread between home prices versus home affordability has stretched and should be monitored.

Many goods and services are out of stock which has led to more demand than supply and therefore price increases. In my experience, once prices rise except for commodities, they rarely come down. This is the counterargument for a more structural move in inflation and not the transitory one coming out of the Fed. Also, wage inflation is taking shape. Due to a lack of workers, businesses are paying more for employees. Again, in my many years in business once you offer someone a higher salary it is hard to take it away. With this in mind, if the Fed is wrong in its position on inflation, the back half of this year could be volatile. If interest rates rise further than expected due to a change in inflation trajectory, there will be shifts in home purchase and home refinance demand as well as a re-pricing of high beta stocks that are using near-zero discount rates. We continue to advocate that borrowers should not wait to lock in historically low interest rates as inflationary pressures grow.

Market Commentary 5/21/21

Posted on May 21, 2021 by Damon Germanides

Mortgage Rates Hold Up As Economic Recovery Continues

In another volatile week on Wall Street, cryptocurrencies crashed as much as 40% in one day before rebounding although Bitcoin remains down significantly from highs reached just a few weeks ago. Existing home sales slipped as home prices across the country hit all-time highs. Affordability will become an issue if home prices continue to surge. Inflation data is concerning but for the moment the bond market is in agreement with the Fed that inflation is more transitory in nature and will settle back down as the year progresses and the U.S. economy normalizes. However, if month-over-month inflation readings push higher, interest rates will spike quickly and the Fed will be forced to act. For now, the combination of ultra-low interest rates and global money printing is the tonic pushing some sectors of equities, real estate, and alternative assets to nosebleed levels. In my primary field of expertise, residential real estate lending, bidding wars on properties are stretching out prices even beyond what the property appraisals. While this is not common, it is happening frequently enough right now to warrant comment. Leverage levels in the equity markets are also very high. Caution is advisable in this environment.

However, banks and mortgage banks are pushing product like I have not seen in many years. While underwriting has loosened up, lenders are still doing proper due diligence and demanding a fair amount of borrower’s “skin in the game” which is keeping prices from being even higher. Many of our borrowers are highly qualified and the combination of low rates and a strong financial statement opens the door to incredibly low rates. Since interest rates are so low, prospective buyers of new homes are justifying the higher price against ultra-low monthly payments and jumping into the market. With supply so tight, buyers must act quickly or miss out on the property.

Looking ahead to next week, we have core inflation data, housing data, and personal spending data. All the important reports have given the markets’ jitters on inflation.

Market Commentary 5/14/21

Posted on May 14, 2021 by Damon Germanides

Mortgage Rates Still Attractive Even With Blow Out CPI Data

This was a wild week for market participants. Inflation readings were hotter than expected but really not a surprise given the massive amount of liquidity sloshing around and the economy experiencing growing pains as the U.S. reopens. Retail sales were strong, but not the blowout number many thought we would see. Perhaps this is a sign that consumer spending will slow in the coming years, which would help rein in inflation on product goods. The argument for goods inflation being transitory is that you can only buy so many new appliances, or upgrade your home throughout the year. Demand has been pushed forward due to the pandemic but now that households are stocked up on goods (think new Apple computer or a dishwasher), there will be some period of time before consumers need to replenish big-ticket items. However, costs to operate a business are up, as are prices for food and gas. Core material prices such as copper and lumber have risen hurting lower-income earners the most.

At the same time, wage inflation is also picking up, which is something the Fed policymakers want to see. It is unclear why there are so many job openings. Some reasons for people not taking better-paying jobs, especially on the lower end, could include stimulus payments that equal lower-end wages, child care challenges, and of course, the fear of taking on a risky more public-facing job while Covid remains a risk. The result of all of this is mass job openings for restaurant workers, retail sales, trucking, etc. Many employers are offering cash bonuses in efforts to hire. Margins are being squeezed which is forcing businesses to not only raise pay but also prices.

With all of the volatility in the marketplace this week, the 10-year Treasury bond has only moved up slightly. For the moment, bond traders are following the Fed’s expectation that inflation is transitory. One hot CPI report does not make a trend, but watch out below should the next few CPI reports confirm an uptrend in inflation. It remains to be seen if the Fed can have it both ways and can keep inflation on goods and services from running too hot while pushing up wage inflation. This is no small task and I have my doubts that it will happen.

Now is the time to take advantage of very attractive rates on mortgages. At some point as the pandemic fades into the rearview mirror, the Fed will need to adjust its ultra-monetary policy and interest rates will rise. The good news is that lenders are very hungry for business, and harder to place loan scenarios that have many options with fair to attractive rates and terms. In a world starved for yields, mortgages have been a great source of income for banks, insurance companies, and the government.

Market Commentary 5/7/21

Posted on May 7, 2021 by Damon Germanides

Interest Rates Tick Higher As April Jobs Report Disappoints

A surprisingly horrible April jobs report sent bond yields down and lifted stocks higher in early morning trading. This report caught many of us off-guard given that the economy is on fire and many businesses are starting to see a return to normal. It is unclear if this was just a one-off poor jobs report, especially given the strong numbers out of payroll giant ADP regarding the jobs recovery earlier in the week. However, some experts, including folks in the Commerce Department, are asking the powers that be to re-think the extended Covid unemployment benefits. This comes on the heels of many customer-facing businesses complaining that they are finding it hard to entice new workers, even after raising wages and offering other incentives.

Asset inflation has been seen for quite some time, as has commodity inflation. There is no doubt that goods and services are becoming more expensive, regardless of what official data states. Consumers don’t need to look past the cost of food, gas, or housing to see that for themselves. Business owners can plainly see inflation in their cost of operations. Many businesses with competitive advantages are raising prices. CEOs of major enterprises are seeing inflation pressures that have not been felt in many years. The big question is: when does inflation become a big enough problem to cause the Fed to react. For the moment, the bunk April’s jobs report has given the Fed cover to remain ultra-dovish for longer, especially as the unemployment rate rose to 6.1%.

As the market digests this counterintuitive jobs report, real estate borrowers may have another window to look to lock in extremely accommodative long-term interest rates. Insignia Mortgage has been advocating for months to take advantage of the Fed’s desire to keep interest rates low for longer before the window closes. The pandemic will end eventually and with incredibly robust economic growth at some point, the Fed will need to taper its bond-buying and artificially suppressed normal level of interest rates. However, it looks as if this jobs report will prop open the window a bit longer.

Market Commentary 4/30/21

Posted on April 30, 2021 by Damon Germanides

U.S. Posts Strong Economic Data As Rates Remain Low

The pace of economic growth in the first quarter of 2021 clocked in at a 6.40% annual rate which was a huge pick up after Covid-19 essentially shut down the global economy this time last year. Consumer spending led the charge as stimulus checks encouraged spending. Business spending remains robust as does durable goods spending. Spending would have been even better were it not for the constraints that a shortage of semi-conductor chips critical to many fundamental products and industries, such as computers and cars. Ford recently stated that the chip shortage has been disruptive to their ability to managing their inventory and deliver new products to the marketplace.

Big corporate earnings are shaping up to be excellent overall. With the U.S equity market trading at all-time highs, the response to fabulous earnings was muted. Inflation concerns continue to circulate, but for the moment, bond traders are in sync with the Fed and the Fed’s belief that inflation is transitory and will settle down. However, there is some concern that the Fed’s measures on inflation are not taking into account how expensive it is for everyday Americans to buy goods and services. Lumber, copper, gas, and food prices have all surged, as have home prices and equity prices. Wage inflation is also rising as many companies cannot find workers willing to work unless they are paid higher wages. Should the bond market get spooked by the threat of inflation running hotter than expected or not being transitory, higher interest rates could hurt both equity and housing markets as prices are already very high and could pull back with higher financing costs.

The Biden tax proposal is ambitious. How it affects investment is an open question, but if the tax proposal removes 1031 exchanges, this change will put real pressure on expensive real estate markets such as California and New York. I often think about what could disrupt our local market and I think the removal of this tax break along with higher taxes on the wealthy will hurt California real estate overall as higher taxes will discourage risk-taking. However, for now, rates remain low and banks are eager to lend as we encourage all of our borrowers past and present to take advantage of extremely accommodative lending conditions.

Market Commentary 4/23/21

Posted on April 23, 2021 by Damon Germanides

Mortgage Rates Lower Even With Talks Of Higher Taxes & Growing Fears Of Inflation

The U.S. economy appears to be on good footing. Corporate earnings are easily beating expectations. For the moment the bond market is calm even as many companies state their intentions of raising prices due to rising input costs. Bond yields have fallen back down to the 1.50% range which was helping high beta growth stocks rise. The one big spook to the market this week came by way of a Bloomberg report announcing major tax hikes on capital gains for the highest-earning Americans. While that caused a sharp sell-off Thursday, equity markets bounced back Friday. It is too soon to really know how this tax increase will play out, but should it pass the Senate, it seems reasonable that it will be a negative for risk-taking which includes buying stocks and more speculative investments.

With so much liquidity sloshing around and so little yield, money is flowing into equities, crypto, and real estate. Bitcoin fell hard this week which speaks to this new digital money’s volatility and why it is still hard to understand how one can transact with a currency that moves around so much day today. Should Bitcoin go down dramatically, I imagine it will hurt other parts of the investment market given the bullish nature of so many on this investment.

Regarding real estate, housing remains on a tear although rising prices and lack of supply are of concern. Banks continue to compete with each other, especially for wealthier clients and with the return of many products in the non-QM space, most borrowers are being approved for home loans, even those borrowers with trickier income or lower credit scores. However, lenders are requiring skin in the game (anywhere from 10% to 20% on jumbo loans, and at least 10% for better-priced government loans), which is keeping borrowers honest and prices from soaring higher.