The markets began Friday morning trading down as the president and the first lady tested positive for Covid-19 which reminded all of us how contagious this disease is. However, by mid-day, stocks recovered much of their losses as Congress confirmed additional stimulus for the economy in the face of a potential second wave of infection, presenting a challenge to economic recovery. The September jobs report was disappointing. The unemployment rate fell to 7.90% from 8.40%. Jobs may have recovered off of their April lows, but the stall is affected by a global economy that is not fully reopened. Many industries are still not operational, or if they are, at very reduced levels.  

Housing remains one of the great positives during this pandemic as potential buyers flee the big cities for the suburbs. People who can afford to be a homeowner are going for it. Mortgage rates at all-time lows are serving as an economic stimulus since reduced payments leave more money in the pockets of homeowners, freeing up dollars for more discretionary spending.

Here at Insignia Mortgage, we continue to see unprecedented demand for residential, bridge, and commercial real estate financing. Fortunately, our suite of lenders has healthy balance sheets, are mostly local and portfolio lenders, and are working closely with our team to help our clients with their real estate financing needs.

Interest rates remain low and may go lower as volatility picks up in the equity market. Some of the reasons of this down market includes a very tense upcoming presidential election, a slowing recovery, high unemployment, and a global uptick in Covid-19 cases, just to name the biggest factors. These concerns should benefit bonds near-term. However, there are some positives as the economy has recovered from the March lows. There has been a spark of innovation due to the pandemic and business data indicates that durable goods sales have picked up. There are also some rumblings that Congress is working on additional stimulus relief packages.

The mortgage environment remains very busy as many borrowers are looking for new homes outside of city centers. Many are also seeking to refinance their existing mortgages at these all-time low-interest rates. Banks continue to underwrite applications vigorously while ensuring that the borrowers they qualify will be able to repay their mortgages. Banks share the concern that as COVID cases continue to spike upward, we may face more shutdowns, as the UK has recently enacted. Keep an eye on weekly unemployment claims, which just moved up, as a sign of where the economy is headed.   

The August jobs report continued to show progress as non-farm payroll employment increased by 1.371 million as the unemployment rate fell to 8.40%. Prior to the COVID-19 outbreak, the unemployment rate was 3.50%. While the jobs picture has improved a great deal from the April high of 14.70%, we still have a long way to go. Also, these numbers don’t take into consideration white-collar workers who have taken pay cuts or whose bonus structure has been adjusted downwards. These high-income earners account for a lot more consumption so it will be interesting to see how consumption looks for the biggest buyers of goods and services in the coming months as the pandemic continues to limit economic activity. Also, the pace of employment gains appears to be slowing as the U.S. heads into the fall and winter months. How the virus reacts to cooler weather is weighing on all of us.  

Treasury and mortgage bond yields traded higher on good, but not great, jobs data. What’s ironic about the move up in interest rates today is that the equity markets are experiencing the heaviest selling pressure since June which typically pushes bond yields lower. With Central Banks printing literally trillions of dollars in currency, the fear is that inflation will finally arrive as evidenced by the hint of upward-moving hourly earnings data which came in well above expectations. This fear seems to be of bigger concern than the recent market volatility. Also, the concentration in mega-tech stocks is where a lot of the carnage is being felt as momentum stocks give up gains, and valuation and fundamentals are being discussed as the reason to buy stocks. Only time will tell if the market is moving past momentum trading. The gains in the tech sector specifically have been positive for those investors who were invested in this sector and have helped increase net worth and consumer confidence.  

In mortgage news, our local-based banks and credit unions continue to offer a wonderful combination of intelligent underwriting and very fair pricing. Purchase transactions are being reviewed quickly and the Southern California housing market is very healthy. Insignia Mortgage continues to offer unique products to help our wide swath of borrowers obtain financing. 

It has been difficult to reconcile the markets. Only a few big tech stocks account for much of the market gains as the pandemic has fast-forwarded digital innovation while also exposing poorly run or heavily debt-laden traditional businesses. Equity markets have risen along with unemployment. Zero percent interest rates on government bonds and high-quality corporate bonds have pushed investors further out of the risk curve as stocks with little earnings have been soaring. Zero-interest rates have also been a big boon for housing and more — specifically single-family homes. Home sales have been on a tear, as well as home improvement. Working from home is likely to continue well into 2021 and our homes have become the center of our universe.  Will people modify their behavior as the pandemic subsides and life feels more “normal”? The tech sector seems to be betting that our collective behavior has changed for good. Personally, I am not so certain, but do like the idea of working from home a couple of days of the week and I don’t mind wearing a mask when I go to the grocery store or pharmacy.  

With weekly unemployment rising, the economic recovery appears to be slowing. Government assistance is designed to help bridge the gap for the many businesses that remain closed or heavily impacted. In order to provide this assistance, the U.S. Treasury continues to offer unprecedented amounts of debt into the market place with no end in sight to finance these benefits. Should confidence wane on the U.S. ability so service this massive debt, rates could move higher, and markets could be disrupted. This is unlikely but something to consider. Also, should mortgage deferments and delinquencies pick up again in the fall, banks may be faced to raise interest rates as well.  

On the positive side, we’ve seen manufacturing data come in better than expected, and virus stats are improving. There are so many different trajectories we could go from here. We all continue to grind week by week, and day by day as we live through the first major pandemic in over 100 years. On the mortgage front, we see no reason to not take advantage of historically low-interest rates. There is just not much juice left to squeeze on interest rates at these levels.

The U.S. Treasury and agency bond markets became more volatile as inflation data heated up and came in better than expected. Unemployment claims dropped below a million claims. Consumers continue to spend even though spending habits have shifted to e-commerce. These reports support the notion that some economic recovery is occurring as businesses and individuals adjust to the pandemic. However, economists and analysts are concerned about how far the economy can grow in the current environment. With major U.S. indexes near or above all-time highs, the dislocation between Wall Street and Main Street will need to be reconciled. Yet there are few alternatives for investors other than equities. Historically low government and corporate bond yields leave investors not a lot of options outside of taking on more risky asset classes. 

The housing market remains busy, fueled by low-interest rates and the desire by many apartment and condo dwellers into single-family homes. The tight supply of single-family homes has also kept prices stable. 

Affluent buyers have been taking on more second and third home purchases in a bid to own more tangible property.

All of this good news suggests rates may move higher. This week the FHFA added .50 bps hit to all refinances, impacting agency products. Mortgage refinances ticked up in response, leaving many people in the middle of a refinance in limbo, wondering if a refi is now worth it. Jumbo-portfolio lenders are less apt to price their products day-to-day and to date, they remain eager to grow their loan volumes. This is good news for our many self-employed borrowers and for those with complex loan scenarios.