Category: Market Trends

Market Commentary 10/20/2023

Posted on by Damon Germanides

10-Year Hits 16-Year High as Fed Extends Higher Rates Push  

In these uncertain times, geopolitical risks rightly dominate headlines. However, the expected “flight to quality” trade, where U.S. interest rates typically decrease as investors seek the safety of government-guaranteed bonds during conflicts, has been notably absent. The primary reason appears to be that substantial government spending has overwhelmed the bond market, in addition to major foreign holders of U.S. debt becoming sellers. Currently, the private sector, including businesses, individuals, and funds, has stepped in to fill this gap. Still, without foreign support, it is likely that bond yields will not fall by much if at all. 

Despite the recent poor performance of the equity market, overall economic data remains relatively strong. Retail spending data released earlier this week indicates that consumers are still spending, albeit more cautiously. Additionally, initial jobless claims came in lower than expected, which underscores an increasingly tight labor market. Even so, it is unlikely that the Fed will raise short-term interest rates at their next meeting, even though the data suggests otherwise. This is because the longer end of the yield curve is rising, with 10-year Treasuries grazing 5% before finally settling at 4.91% on Friday morning. The 10-year Treasury note rate serves as the benchmark for pricing all forms of personal, real estate, and business debt. The rapid increase in yields on this instrument is adding pressure to all types of borrowers, so the Fed may allow the market to contribute to slowing down the economy. 

Loans, Rates, and Real Estate

Real estate, which is highly sensitive to interest rates, continues to face challenges. It is difficult to gauge precisely how higher rates have affected prices due to sluggish sales. However, builder sentiment is declining, and new home sales show signs of following suit, despite incentives offered by home builders such as buy-downs and free upgrades. The commercial lending markets are under significant pressure, as a 5% 10-year Treasury rate is expected to push cap rate floors to 6% or even higher. Private debt funds providing bridge loans remain active, while traditional banks are cautious on most deals. With many billions of dollars in loan resets scheduled for 2024, the commercial lending market is shaping up to be remarkably interesting. 

We have said it before and will reiterate that in today’s market, independent mortgage brokers with a wide range of lending options are providing value to potential borrowers. The significant disparity in rates from one bank to another often reflects the bank’s perception of the economy, the housing market, or the local area, rather than market conditions alone. Large banks are keeping their margins healthy, except for their high-net-worth clients. Brokers are once again making a meaningful difference. 

Market Commentary 10/13/2023

Posted on by Damon Germanides

Signs of Aggravated Inflation on Horizon Despite Geopolitical Worries 

The world is rapidly becoming a more perilous place, as we all witnessed the horrific attacks by Hamas on innocent Israeli civilians. Israel’s response is still unfolding. There is a growing concern about a full-scale, multi-front war, involving Israel and its neighboring countries. There are significant global implications with any decision. Meanwhile, tensions continue to escalate between Ukraine and Russia, with an assertive China adding to the complexity. The United States finds itself stretched thin as it works to maintain global stability. 

One might expect bond yields to experience a sharp decline in response to increased uncertainty, often seen as a “flight to safety” trade. However, massive government bond issuance, coupled with higher-than-expected readings in both the Producer Price Index and Consumer Price Index, have prevented yields from dropping dramatically. Inflation remains a pressing issue in our country, with consumer inflation surging by approximately 20% over the past two and a half years. This places a significant burden on most families, as wages fail to rise proportionally. 

The challenge of home affordability continues to plague the housing market, leading to a sense of stagnation. Nevertheless, existing home inventory is gradually increasing, and as homes linger on the market, sellers may be inclined to lower prices to attract buyers. We are hearing anecdotally from our network of realtors and appraisers that the Southern California market is displaying signs of softening. However, sellers remain hesitant to reduce prices. With the Federal Reserve maintaining a stance of “higher for longer” on interest rates, the likelihood of rates decreasing remains low. Consequently, supply and demand will need to find equilibrium, necessitating lower real estate prices at some point. 

The Fed’s Lag Effects & Real Estate 

The commercial CMBS (Commercial Mortgage-Backed Securities) debt market carries a high likelihood of experiencing a wave of defaults. Many real estate investors will soon face challenging decisions as their debt matures in 2024 and beyond. Banks are tightening their lending standards. With cap rates on the rise, commercial real estate will continue to face pressure in the coming years as prices adjust to higher cap rates, resulting in lower valuations. Additionally, numerous construction projects are being put on hold with debt financing costs reaching 10% or higher. The lag effects of the Fed’s interest rate policies are beginning to ripple through the financial system. 

For those of us who have built our careers in real estate, whether on the acquisition or lending side… This period is widely regarded as one of the most challenging in real estate history. Why? We are confronted with a multitude of challenges simultaneously. Residential real estate prices remain high, with little sign of significant softening. The interest rate environment is at a 20-year high, making homeownership unattainable for many due to a lack of affordability. Moreover, many banks are either unable or unwilling to lend, as they grapple with balance sheet issues stemming from the prolonged period of low interest rates. After the 2008 financial crisis, banks were eager to lend as rates dropped, and government programs stabilized the markets, providing tailwinds for real estate brokers and lenders. Now, the Fed is pushing for home price depreciation as a means to combat inflation. 

Given the formidable landscape, only the most dedicated individuals will thrive in this market as transaction volume remains sluggish. At Insignia Mortgage, we are seizing this opportunity to connect with past borrowers, realtors, and referral partners, offering updates on niche lending programs that can assist potential buyers or those seeking to refinance. We are proactively reaching out to local lenders to establish new relationships, as some banks are in need of lending capacity and are offering unique products with minimal rate markups compared to traditional loan products. Additionally, we are conducting informative sessions at offices, explaining more specialized products like jumbo 2-1 buydowns, cross-collateralized loans, and bridge loans that address immediate needs while we work on securing more permanent financing. Ultimately, our experienced team, with an average of over 20 years in the industry, is committed to providing value to our real estate partners through hard work and expertise. 

Market Commentary 10/6/2023

Posted on by Damon Germanides

Strong Jobs Market Boosts Equities 

A better-than-expected jobs report had a strong negative impact on both the bond and equity markets Friday morning, with the initial market reaction suggesting that good news might be bad news for bonds. However, a closer examination of the jobs report data reveals that wage increases are flattening, and hours worked are declining. This likely explains the subsequent market reversal, with mortgage bond yields still up but not as much, and the equity markets rallying. On the downside, the probability of yet another rate hike increased after the latest jobs report, with the odds of a hike rising from last week’s 18% to around 30%. 

It’s almost as if the WSJ has been reading our blog (joking), as Friday’s paper featured an article explaining the importance of shopping for a mortgage in today’s lending market. Banks are now offering varying interest rates, with differences of up to 1%. This aligns perfectly with what we do at Insignia Mortgage. Our experienced and dedicated broker team actively seeks the best execution for each deal by matching a borrower’s financials with the best-priced lender. Given our expertise in reviewing complex financials, we’ve noticed significant variations between lenders. Our hard work continues to pay off as clients trust us to secure their unique mortgages. 

Look out for a recap of our recent loan successes for more insight into the complexity of our client financial scenarios. While the market may be volatile, our commitment to creating individualized lending solutions remains steadfast.  

Market Commentary 9/29/2023

Posted on by Damon Germanides

Better-Than-Expected Inflation Readings Fail to Lower Rates 

Although the market welcomed a better-than-expected core PCE report (the Fed’s favored inflation gauge), it had a less-than-desired impact on bond yields. Several factors may have contributed to this subdued response from the bond market. The looming government shutdown, with a staggering $33 trillion in debt, has cast a shadow on any other momentum. In addition, a significant strike by the United Auto Workers is likely to encourage other large unions to demand higher wages. Matters become further complicated by the tight oil supply causing oil prices to push back toward $100 per barrel. 

Speaking of oil, it is worth noting that the PCE metric excludes the more volatile components of inflation, namely food and energy. With energy prices surging in recent months and the cost of living growing larger, this report offers little relief to most Americans. 

Homebuyers Barred from Market Due to Mortgage Rates 

Higher mortgage rates are now dampening demand, making the market inaccessible to many potential homebuyers. Homebuilders try to clear inventory by reducing prices and offering substantial incentives, such as 2-1 buydowns on mortgage applicants. While the tight supply in the resale housing market prevents prices from dropping significantly, an economic downturn could leave people struggling to afford mortgage payments as other costs rise. In California, the soaring costs of health and homeowner’s insurance are becoming increasingly burdensome for small businesses and homeowners. Credit card costs have also shot up, comfortably exceeding 20%. 

Lower-rated credit card borrowers are beginning to make delinquent payments, signaling that the Fed’s substantial rate hikes are starting to take a toll. However, despite some receding, inflation is not rapidly decreasing. Americans are grappling with both higher capital costs and increased expenses. While the economy continues to show resilience, many are beginning to feel the severity of a slowing economy and a higher inflationary environment. 

Prominent figures like Jamie Dimon and Bill Ackman, both Wall Street legends, would not be surprised by higher rates. They foresee rates settling above 5.00% at the long end of the curve. We share this view and are closely monitoring how the markets adapt to a world of elevated interest rates. 

Circling back to mortgages, this market remains difficult and fragmented.  The days of speaking to one or two banks on a deal are gone. Insignia Mortgage provides value by surveying many different lenders on each deal and locating incredibly competitive terms for prospective borrowers, especially those borrowers with more complex or nuanced financial profiles. 

Market Commentary 9/22/2023

Posted on by Damon Germanides

A Quick Comment on the Fed, Bonds & Housing

The FED

The bond market, which had initially resisted the idea of a prolonged period of higher interest rates, has embraced the idea that inflation is likely to remain elevated. We have consistently stressed that transitioning from a 3% to a 2% inflation rate would be fraught with challenges. As inflation accelerates, bond investors are increasingly seeking higher yields to compensate for this risk. Additional factors exacerbating the inflation issue include surging oil prices, large unions demanding substantial wage increases, a staggering $33 trillion deficit, and a Federal Reserve engaged in selling (QT) rather than buying bonds, among other pressing concerns. Unfortunately, none of these factors bode well for lower interest rates. The Fed’s recent communication, particularly the dot plot, has pushed expectations of rate cuts further into the future. This is because the economy continues to perform better than anticipated, and some indication that inflation may have plateaued at a level that remains unacceptably high for most Americans. While the likelihood of a soft landing is slim, we recognize that anything is possible in these complex economic times.

Bonds

Shifting our focus to bonds, it’s intriguing to consider why many on Wall Street seemed caught off guard by the prevailing interest rate environment. Although we acknowledge our own past misjudgments, we have consistently argued that there is a high risk of shifting toward a higher interest rate environment. Assuming inflation stabilizes at 3%, and incorporating a term premium of 1.5% to 2%, longer-dated bonds should hover around 4.50% to 5%. This appears to be the new normal, and individuals and businesses alike should base their investment and lending decisions on these assumptions. The far-reaching impacts of rising interest rates are just beginning to permeate the system. We can attest to this firsthand as prospective borrowers grapple with refinancing challenges and encounter difficulties in qualifying for new purchases.

Housing

While housing affordability remains a significant issue for many, home prices continue to remain high and are even rising in certain markets. In hindsight, the reason for this becomes apparent: nearly 15 years of ultra-low interest rate policies have left the majority of U.S. homeowners locked into mortgages below 5%. This has discouraged potential sellers from listing their homes, while higher rates have deterred would-be buyers. In an unusual twist, the forces of supply and demand are to some extent canceling each other out. This dynamic has helped sustain property values in the non-ultra-luxury segment of the market. 

Still, there are signs of potential trouble ahead as home builders are starting to offer major incentives such as 2-1 buy downs on mortgages as well as lower prices, in an effort to stimulate volume. Additionally, pressure increases on the commercial and multi-family segments of the market as loans begin to adjust. In some cases, current values considerably decreased compared to just a few years ago.

Market Commentary 9/15/2023

Posted on by Admin

Additional Fed Hike by Year End Suggested by High CPI Readings  

Bonds continue their upward trajectory in response to the latest CPI and PPI inflation readings. As we’ve often pointed out, the path from 3% to 2% inflation presents many challenges. Both the Federal Reserve and the average American consumer face escalating home prices, rising food costs, and surging energy expenses. 

While financial experts may attempt to interpret inflation reports in various ways, we believe it’s crucial to focus on food and energy costs. These commodities, although volatile, are indispensable elements of our modern world. Therefore, the persistent high costs of food and energy, coupled with ongoing wage inflation, are likely to keep the Federal Reserve from implementing any interest rate hikes in the upcoming week. Our expectation is that they will project an additional rate hike in November. Furthermore, it’s prudent not to anticipate any rate cuts from the Fed until at least the end of next year. 

In the broader real estate market, office spaces continue to face problems. Nevertheless, there is a growing trend of companies reintroducing return-to-office requirements for employees. This shift could establish a floor for declining office values. In certain cities, office property values have plummeted by over 50%. What was once deemed a prime asset class is undergoing a transformation. Newer, amenity-rich office spaces may thrive, while older, cash-cow office buildings owned by generational landlords might ultimately be more valuable as land than as operational structures. However, there is emerging concern about the multifamily real estate sector, as a substantial amount of multifamily CMBS debt is set to mature in 2024 and 2025. In contrast, the single-family homes market remains largely unaffected by rising interest rates. This is primarily because many potential sellers are holding onto mortgages with rates below 5%. Such favorable rates are discouraging homeowners from listing their properties for sale.  

Our attention is now focused on the 10-year Treasury yield, which recently closed just below 4.35%. Should it breach this level, yields will likely surge past 4.5%. There is currently little evidence to suggest that interest rates will move lower. It’s worth noting that interest rate cycles tend to be lengthy, a point emphasized by the renowned bond investor Bill Gross, often referred to as the “Bond King.” Gross once underscored the significance of the 30-year bull market in bonds, where declining rates are considered bullish in bond markets, as one of the defining features of his career. 

Market Commentary 9/8/2023

Posted on by Damon Germanides

Has Inflation Peaked? Bond Market Yields Suggest Uncertainty… 

Where Does Inflation Go from Here? 

A peak in service inflation may be on the horizon. A noteworthy example is Walmart, one of the nation’s largest employers, which recently announced that new hires will be earning less. This adjustment signifies a potential slowdown in wage inflation, which had surged to unsustainable levels due to the pandemic, supply chain bottlenecks, and substantial government stimulus. Initially encouraged by the Fed, this wave of inflation is unlike anything witnessed in the past 40 years and was largely due to the assumption that inflation would be transitory. 

While we are witnessing some moderation in inflation concerning goods (though still too high by our standards), service inflation remains persistently elevated. This is placing significant strain on businesses of all sizes, as consumers are becoming less tolerant of higher-priced goods and services. This is why the Fed is not rushing to lower interest rates.  

The situation becomes increasingly complex when we consider why interest rates remain high despite indications that inflation might be cooling off. Two key factors come into play. Firstly, the price of oil, hovering around $90 per barrel, is preventing a more significant drop in inflation. Although the Consumer Price Index (CPI) has declined from over 9% to roughly 3.2%, moving from 3.2% to 2% will be a lengthy process for the Fed. Secondly, the massive budget deficits of many developed nations are no longer being disregarded by bond traders (this includes the United States). Our government’s debt burden has led bond buyers to demand higher yields to compensate for the perceived risks associated with holding such bonds. 

Lastly, it is important to recognize that interest rate cycles are lengthy, whether on the ascent or descent. We are currently on an upward trend. Unless significant adverse events occur, this trajectory is likely to persist.  Assuming a 3% long-term inflation rate, it is not inconceivable that longer-dated bonds trade between 4% -5%.   

In the Next Two Weeks… 

Keep a close watch on next week’s inflation readings and the subsequent week’s Federal Open Market Committee meeting. In the current climate, everything revolves around inflation and interest rates. Additionally, pay attention to the 10-year Treasury bond, which is teetering at the 4.25% mark. If it breaches 4.35%, the markets could face a challenging remainder of the year. 

Market Commentary 9/1/2023 

Posted on by Damon Germanides

Bonds Can’t Catch A Break Amidst Unemployment Rate Increase 

The July Jobs Report brought encouraging signals for both the bond market and the Fed. However, the workforce saw an influx of more workers than could be absorbed, resulting in the unemployment rate rising from 3.50% to 3.80%. While wages are still growing, they are beginning to moderate and show signs of trending lower. This shift might provide the Fed with justification to hold off raising rates at its next meeting. Although the futures market indicates around a 40% chance of a November rate hike, we anticipate that this might mark the last rate increase of the cycle (if it does occur). On the other hand, mortgage bonds and Treasury yields oddly increased, potentially influenced by a weakening dollar and surging oil prices. 

Nonetheless, it’s important to avoid drawing broad conclusions from a single report. Commodity price inflation and service inflation remain high, and the Fed would likely want to see more substantial declines in these numbers. Conversations with local business owners reveal that input costs are eroding profits. Passing these increases on to customers is becoming increasingly challenging. The persistent difficulty business owners have in finding staff is keeping wages elevated. Notably, a major national retailer catering to lower to middle-income consumers, Dollar General, has reported that its customers are feeling financial pressure and adjusting their purchasing habits. This demographic has been hit hardest by elevated prices and could be a significant concern for the Fed. This context supports our belief that even if the Fed stops raising rates, a downward shift in interest rates might be a prolonged journey. Fed Funds rates could remain potentially elevated well into 2024 or even 2025. 

Loan Success Takes Grit 

Navigating the mortgage landscape is no longer a straightforward endeavor. While we maintain access to excellent products and lenders and are successfully closing loans, the path can be turbulent. Underwriting guidelines at banks are tightening, debt funds and mortgage banks are grappling with an illiquid secondary market, and limited housing supply in major cities complicates loan qualification. Financing costs have surged while housing prices have remained stagnant, particularly affecting higher-end home purchases. In this landscape, experienced mortgage brokers are proving invaluable by sourcing better-priced loan options, exploring more nuanced alternatives like interest-only or investment property loans, and connecting with smaller banks that embrace innovative thinking. Our broker team at Insignia Mortgage, for instance, achieved over $40 million in closings in July, while our fix-and-flip and bridge lending arm, Insignia Capital Corp, closed over $12 million in business. It was far from effortless. What matters most is that all our clients successfully completed their crucial transactions. 

Market Commentary 8/11/2023

Posted on by Damon Germanides

Rates Can’t Catch A Break  

Although the Fed is making progress in the battle against inflation, a tougher phase awaits in substantially curbing inflation due to the so-called base effects. The forecast for tougher times cemented itself after surpassing last June’s 9 percent plus CPI reading. Some experts on Wall Street anticipate that inflation readings for August may climb higher since July witnessed significant hikes in oil, gas, and other commodity prices. While service and wage inflation has shown moderation, their persistence coupled with recent wholesale inflation figures indicates a larger-than-anticipated rise. Our stance remains that the Fed will not be lowering rates anytime soon, considering the daily struggle of America’s most vulnerable to cope with rising costs. 

The combination of stubborn inflation and a budget deficit of more than 1 trillion dollars puts pressure on US Treasuries and government-guaranteed mortgage debt. Concerned voices are clamoring in response to the size of our debt and its long-term sustainability. Global issues further complicate the US Bond market with Japan’s loosening yield curve control, China and Europe’s economic dilemmas, and the ongoing conflict in Ukraine. Investors are demanding higher yields, a phenomenon reflected in the 10-year Treasury comfortably crossing the 4.00% mark, with longer-term bonds nearing 4.500%. The point at which these elevated yields begin impacting the equity and housing markets is uncertain. However, it is increasingly likely that both sectors will be negatively affected by rising rates. 

We recently emphasized the significance of the Fitch downgrade of the US credit to AA+. Although Wall Street didn’t fully grasp the implications of this situation, the narrative has evolved. Unlike 2011, this downgrade reflects much higher debt/GDP ratios, unsustainable budget deficits, and a more dysfunctional US political system. Whenever the cost of capital is negatively influenced, it deserves serious consideration. 

From our network of banks and lenders, we’re hearing signals that the long and variable impacts of Fed policy are starting to reverberate through the system. Delinquencies and loan modifications on commercial loans are on the rise. Businesses are facing squeezed revenue and operating margins. Credit card balances are soaring. These effects warrant careful observation in the upcoming months. 

Our broker team invests significant time in discovering new lenders, many of whom remain unfamiliar with the market. It might sound biased, but having a robust mortgage broker on your side is crucial in today’s landscape. Transactions are encountering a myriad of issues, and the ability to swiftly pivot to a new lender or solve a problem is invaluable. The Insignia Mortgage broker team excels in both these domains, while also securing the most competitive rates and terms for complex loans. The days of relying solely on one big bank for client loans are long gone. 

During our recent attendance at the Inman conference in Las Vegas, NV, we gathered intriguing insights from various speakers about the market’s current state: 

  • Quicken Loans anticipates improvements in the rate market in the coming months. The drop in mortgage brokers, real estate brokers, and salespersons signifies the existing home market remains somewhat stagnant. While it presents challenges, it could pave the way for those who navigate it successfully. 
  • Traditionally, existing home sales constituted a major portion of the market, but current homeowners are reluctant to move. However, around 25% are planning to relocate within the next few years, aligning with Quicken’s recommendation to persevere. 
  • Zillow predicts that rates will remain high for longer than Wall Street anticipates. Service inflation and housing shortages contribute to inflation, and the focal point for home buyers should be millennials, who are expected to make up 43% of new home buyers. 
  • The mortgage and real estate industry must adapt to AI (Artificial Intelligence), incorporating it into lead generation and follow-up strategies. With AI we can achieve more with less. The challenge lies in how effectively we embrace it. While 20% will seize the opportunity, the remaining 80% might miss out. Those who embrace AI stand to gain efficiency and profitability. 

Market Commentary 8/5/2023

Posted on by Damon Germanides

Bonds & Equities Shaken By Fitch Downgrade Of US Credit

This week was filled with noteworthy economic developments. The bond market experienced significant fluctuations following Fitch’s downgrade of the US credit rating from AAA to AA. The latest July Jobs Report, though weaker than expected, provided some relief to the bond market (which experienced a notable climb earlier in the week). Nonetheless, persistent wage growth and a tight job market continue to challenge the Federal Reserve. As a result, inflation remains a concern at the forefront.

Amidst these developments, other factors are contributing to inflationary pressures. These factors include rising commodity prices, geopolitical tensions, and potential labor strikes. While the immediate impact of the Fitch downgrade may be limited, it serves as a vital reminder that addressing long-term spending issues is important for our nation’s prosperity.

The Future Of Rates & The Impact Of Inflation

The path of interest rates remains uncertain. Some potential scenarios range from further rate hikes due to wage inflation to a soft-landing recession narrative. All outcomes necessitate careful navigation of the Fed’s interest rate and QT policies. While we observe signs of falling inflation, wage inflation persists, leaving room for at least one more potential rate hike (if not two) in the future.

On the other hand, the consequences of the Fed’s substantial rate hikes over the past year and QT policies are gradually seeping into the financial system. As interest rates rise, lenders are tightening their loan offerings. Narrowing such loan options could impact economic growth in the coming months. Even so, it is worth noting that the American consumer has demonstrated remarkable resilience, readily accepting higher interest rates and loan payments.

The normalization of mortgage rates on a historical basis is apparent, but when combined with soaring home prices, the overall cost feels steep. As a result, the existing home sale market has experienced a slowdown in activity. At the same time, some market segments have witnessed odd price increases due to a lack of available housing supply. Despite these challenges, the adaptability of consumers underscores their ability to weather economic fluctuations.