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Market Commentary 5/3/2024

Posted on by Damon Germanides

Fed Believes Inflation Will Decline Without Further Rate Hikes 

Markets found solace as the Fed committed to returning inflation to 2% without the need for further interest rate hikes. The April Jobs Report was disappointing while jobs growth came in lower than expected, pushing yields on Treasuries and mortgage-related products lower. April non-farm unemployment clocked in at 3.9% up a tick and hourly wage growth cooled, a data point that must stabilize for the Fed to begin lowering rates.  

The economy’s trajectory remains uncertain, compounded by the unprecedented government spending in response to Covid. The influx of funds continues to impact the economy in unforeseen ways, challenging traditional economic models’ predictive accuracy. 

Overall, the economy remains a mixed bag and is a fool’s errand predicting where interest rates and the financial system are headed.  Even the Fed, with a world of data and Ph.D.’s, has been wrong during the last few years. With trillions of dollars moving through our economy, many economic models were not designed to interpret this type of spending with accuracy.     

Keep an eye on the Treasury issuance as the Government has increased the money it will need to borrow for Government funding.  This may put a floor on interest rates overall.  However, for the moment a 10-year Treasury of around 4.50% feels about right given the uncertainty in the world. 

Market Commentary 04/26/2024

Posted on by Damon Germanides

Equity Markets Bounce Back As Inflation Firms

The near-term trajectory of interest rates became increasingly ambiguous this week. GDP growth rates slowed more than forecasted while inflation firmed up, indicating a prolonged path to reach the 2% inflation target. The ten-year Treasury yield remains steady above 4.500%, with expectations of staying within a range of 4.500% to 5.00% in the near term. Additionally the upward trend of core PCE, the Fed’s preferred inflation measure, further dampened prospects for a near-term rate reduction. Speculation suggests the first rate cut may not occur until December 2024. Chair Powell is likely to adopt a more hawkish stance given the rise in inflation, consumer spending, and the overall resilient economy.

While the economy appears robust and recession concerns have eased, underlying issues remain. Credit card debt has increased, accompanied by a rise in late payments. This is a strong indication that the surge in living costs is becoming increasingly burdensome, particularly with credit card rates exceeding 20%. Commercial real estate, especially office and some multi-family projects is under considerable stress. With interest rates on the rise, more defaults will be coming. With mortgage rates for conforming loans reaching the high 6’s to mid-7’s and high-quality jumbo loans hovering around the 6’s, there’s apprehension about a potential slowdown in the home purchase market, particularly in existing home sales. Despite this, the new home market continues to attract strong interest driven by home builders, incentives, and access to inventory.

Navigating the real estate and lending landscape in today’s environment poses significant challenges. Banks facing capital constraints and market volatility affect lenders’ ability to lower interest rates in a dynamic landscape. Constantly surveying the marketplace has become a daily practice for our team, enabling our boutique brokerage to secure deals effectively. Understanding the nuances of the market is paramount, given the notable variance in rates—sometimes up to 1/4% – 1/2% —among lenders offering similar products. This underscores the importance of being a broker and having access to a diverse range of products, from private banking and niche portfolio loans to government and conforming loans.

Market Commentary 4/19/2024

Posted on by Damon Germanides

Economic and Geopolitical Pressures Weight On Bonds

Today’s market landscape is challenging to handicap due to global politics and Federal Reserve actions. Risky investments, including high-beta momentum stocks like artificial intelligence, are facing pressure. The market is adjusting to the possibility of fewer rate cuts this year—even just one or none. The Fed has changed course due to ongoing inflation, strong job numbers, solid retail sales, and positive manufacturing data. These factors indicate that rate cuts may be on hold for now. Additionally, with oil prices above $80 per barrel, significant drops in interest rates are unlikely. Despite global efforts to reduce fossil fuel reliance, our economy remains tied to oil, impacting interest rates and inflation.

Interest rates remain higher than expected despite market fluctuations. This persistent high can be attributed to ongoing inflation, a challenging economy, and substantial government debt issuance. The Wall Street Journal reported that mortgage rates for standard loans have risen above 7%. Meanwhile, home sales have dipped during what is typically the busiest season, presenting challenges for buyers facing high prices and limited options in coastal cities.

The rising cost of living may soon affect the housing market. Over time, some homeowners may be compelled to sell to access cash, particularly if equity markets experience corrections. Major companies like Netflix and Nvidia have already seen significant downturns.

It appears that market optimism regarding rate cuts was premature. The recent market dynamics require investors and homebuyers to approach decisions with caution. The Federal Reserve, under its chairman’s leadership, faces a complex scenario that is somewhat concerning. Although the bond market seems oversold, lower rates may not materialize for some time. It is essential to remain vigilant and prepared for various outcomes. Keep a close watch on commercial real estate, as the Fed’s higher-for-longer stance is becoming a significant issue for some asset classes. Remember, volatile times also bring opportunities for well-informed and patient investors.

Market Commentary 4/12/2024

Posted on by Damon Germanides

Rates Drift Higher Bringing Inflation Back On Investors’ Minds

A robust labor report, coupled with strong consumer and inflation concerns, has made the recent rise in interest rates top of mind in the financial markets. We’ve been observing this trend with caution, given the conflicting signals from the Federal Reserve on the necessity of rate cuts amidst inflationary pressures.

As we navigate these developments, we find ourselves in a situation where oil prices are nearing $90 per barrel, inflation remains elevated, and the economy continues to exhibit resilience. Such factors may not warrant an immediate rate cut in June. Nonetheless, sectors like commercial real estate and regional banks stand to benefit from a reduction in rates, alleviating ongoing strains. The Fed must do the almost impossible to balance all the data points as inflation lingers on.

Despite the challenges in housing affordability, the Federal Reserve must exercise prudence to avoid any missteps. We anticipate a shift in the narrative surrounding rate cuts, with increased caution likely taking precedence. This may keep interest rates at current levels as the markets digest the reduced odds of a June rate cut by the Fed.

Looking Ahead: First Quarter Earnings

Upcoming first-quarter earnings will provide valuable insights into the economic landscape, shedding light on the sustainability and trajectory of various industries.

In the mortgage market, rates have faced upward pressure.  Geopolitical tensions in Europe and the Middle East may benefit bond yields in what is known as the ‘flight to safety’ trade. With bonds oversold it won’t take much to get a small rate rally going.

Market Commentary 3/15/2024

Posted on by Damon Germanides

Hot Inflation Data Takes The Shine Out of Bonds

Hotter-than-expected CPI and PPI data caused bond traders to adjust their expectations on Fed rate cuts, causing a decline in US Treasuries. Despite a decent jobs report indicating continued hiring, many Americans are taking on multiple jobs to cope with rising costs. For example, everyday goods are significantly more expensive than pre-Covid times. On top of that, job creation has been predominantly driven by necessity rather than productivity-enhancing employment.

Nevertheless, the economy displays resilience amidst many negative factors, including credit card and auto-loan defaults, geopolitical tensions, and oil prices hovering around $80 per barrel. Speculative investments in AI, daily options, and crypto remain robust. Such data suggests that financial conditions may not be as tight as anticipated, potentially leading to Fed rate cut disappointments. Although rate cuts would be welcomed, market dynamics currently support a narrative of 1-3 cuts rather than the 6 cuts expected at the beginning of the year. We should gain more clarity on the path of interest rates next week when the Japanese and US Central Banks meet. Japan is expected to move away from negative interest rate policies. 

Despite the rise in Treasuries, mortgage rates remain relatively stable. Banks and financial firms continue to maintain razor-thin margins in an increasingly competitive market. With refinance activity at a 20-year low, success in today’s mortgage market hinges on strong relationships with realtors and financial planners.

Although many homeowners benefit from low-rate mortgages, other expenses such as credit card interest, insurance, margin debt, and household costs continue to rise. The prolonged period of low interest rates has led to an accumulation of homes, with homeowners staying put longer than historical norms. However, signs suggest this trend may be shifting. According to Zillow in February, homeowners in some regions are increasingly likely to list their properties for sale. 

Regarding the recent NAR settlement and its potential impact on commissions, no lenders have yet offered financing options for buyers. This significant ruling is expected to reshape buyer-seller interactions in real estate transactions, and we will continue to monitor and provide updates as necessary.

Market Commentary 03/01/2024

Posted on by Damon Germanides

How Non-Traditional Mortgages Are Benefiting From Animal Spirits

Speculation and momentum are driving many public markets, from cryptocurrencies and zero-day options to companies at the forefront of AI. Even non-fungible tokens are seeing renewed interest. Investors seem willing to take on more risk for less reward, as evidenced by compressed bond and equity spreads. Expectations of higher interest rates persist, yet animal spirits remain strong, suggesting that financial conditions may not be as tight as feared. The outlook for rate cuts has diminished. Renewed discussion by economists indicates the possibility of only one expected cut (the consensus of 3 cuts remains).

Interestingly, in the residential mortgage market, non-traditional lenders are competitively pricing single-family, mortgages. Borrowers with some income documentation, good credit, and a larger down payment, may secure mortgages at rates in the mid-6s. This represents a significant improvement from just a few months ago, particularly for non-QM products catering to less traditional borrowers. Also, these lenders continue to raise jumbo loan limits. These products, only slightly higher in interest rate than traditional loans, support real estate and mortgage brokers in their accessibility. 

A recent bullish publication featured balloons floating into the sky, which may indicate a sign of market exuberance. Front-page stories often precede market peaks, and while we say this half-heartedly, it’s worth noting. Despite potential headwinds such as geopolitical tensions, higher oil prices, and persistent inflation, the market seems to be discounting them for now. If sentiment turns, bonds could rally. This would push mortgage yields lower right in time for the spring buying season.

Market Commentary 02/23/2024

Posted on by Damon Germanides


The Promise Of AI & How It Will Affect Real Estate

As the promises of artificial intelligence (AI) and machine learning continue to propel equity markets, significant transformation lies ahead for various industries, including the mortgage business. While this shift may evoke both excitement and apprehension, embracing AI-driven processes offers the potential for increased efficiency, streamlined operations, and enhanced profitability.

But why is a real estate newsletter delving into the realm of AI? The answer lies in recognizing AI as a disruptive technology poised to revolutionize our lives akin to milestones like the automobile and flight. Moreover, it serves as a deflationary force, gradually reducing costs across goods and services.

In the context of residential real estate and mortgage origination, AI has the potential to identify promising prospects within each of our networks by leveraging vast computing power to assess probabilities. For realtors, AI can pinpoint prospective buyers or sellers based on life circumstances or shifts in employment status and provide real-time triggers. 

This forward-looking optimism in the market has implications for interest rates, likely keeping them elevated for longer periods due to positive economic outlooks. As equity markets surge and financial conditions ease, individuals are inclined to spend more. Such increased activity prevents inflation from being lowered, delaying the anticipated rate cuts by the Federal Reserve. Consequently, interest rates have risen, with conforming loans hovering in the mid to upper 6% range, and jumbo loans around 6%.

In line with our assessment, a major Wall Street research firm has reached a similar conclusion: the overall expense of retaining a home you no longer desire is likely to bolster existing inventory. This is particularly true with rents on the decline and so many multi-family units becoming available. Such a trend has the potential to ease some of the strain on housing affordability and open up fresh opportunities in the real estate market.

Market Commentary 02/16/2024

Posted on by Damon Germanides

 

Inflation Proves Sticky As Interest Rates Rise

We are sensing not all is well in the world and that it’s time to be mindful that the rise in equities doesn’t tell the whole story. For those who follow these things, company after company is laying off workers suggesting that the unemployment rate may be headed higher. Commercial real estate loan portfolios held by large banks are increasingly at risk. The US debt now well above $34 trillion is no longer tomorrow’s problem.  Massive Treasury issuance in the coming months may put additional pressure on bond yields.

Of additional concern is a hotter-than-expected CPI print, and the stickiness of service-related inflation. Friday brought yet another disappointing inflation report, with the PPI or wholesale inflation readings leveling off.  As we have suggested in past commentaries, inflation is a tricky beast, and bringing it down to 2% from current levels will take time. This has pushed out the odds of the first-rate cut to June from March, which was the belief of the markets a short while ago. 

We are now left with the higher for longer interest rates story, which we think should increase the supply of homes and bring down home pricing over time. Outside a person’s mortgage as a reason to keep their home, there is the dramatic rise in the costs to maintain the home along with the cost of insurance, as well as the climbing expense of overall living, which may work to realtors’ favor this spring (especially for empty nesters). Simply holding on to a home because of a low mortgage makes less economic sense if the other expenses rise enough to offset the benefits. 

On the positive side, the single-family 1-4 lending market remains quite liquid. The combination of big and small banks, mortgage banks, and Life Co firms in the space has created a considerable suite of products. Also, because rates are not likely to go up much further banks are tightening spreads on loans to win deals. 

Listed below are examples of some of the more interesting products:

  • 1st mortgages up to 80% to $10M and 75% to $20M with rates starting a touch above 6%
  • 1st mortgages with 10% down program available up to $3M with rates starting above 7%
  • 1st mortgages with 40% down and no income or employment verification loans up to $3.5M. Rates start at mid 7%
  • 1st mortgages crossing other properties with no down payment up to $15M with rates in from 6%-7%
  • Construction loans for personal residences up to 65% of cost to $15M with rates from 6%7%

Market Commentary 02/09/2024

Posted on by Damon Germanides

Direction Of Economy Uncertain As S&P Breaks 5K 

If you’re feeling confused about the economy’s trajectory, you’re not alone. As a recap, the stock market has been soaring to new heights driven largely by the optimism surrounding AI. Certain high-frequency indicators like auto and credit card delinquencies have spiked. Inflation levels are off at a rate over 20% higher than in previous years. Finally, many in the US remain unsettled about their future as they are forced to live paycheck to paycheck, even while earning over $100K per year. 

Just weeks ago, Wall Street anticipated six or more rate hikes, but now forecasts have been revised down to perhaps four. Ongoing hints from the Fed suggest potential interest rate reductions by mid-year. We reiterate inflation is public enemy number one and that is why the Fed will move very carefully with rate reductions.  

Despite ongoing challenges, the housing market remains resilient, with homeowners reluctant to part with their low-rate mortgages. Nonetheless, the limited housing supply continues to strain affordability. Paradoxically, lower interest rates could stimulate existing home inventory, alleviating supply constraints and offering more choices to buyers. 

Commercial real estate, particularly office spaces, is facing significant pressure. Prolonged interest rates raised by the Fed may hasten the exposure of poorly underwritten transactions with historically low cap rates, rendering them unfinanceable. Additional events, such as the collapse of a large European real estate fund (as reported in the WSJ) hint at more difficulties ahead for this sector. 

Amidst robust economic data, low unemployment, and a thriving stock market, long-term interest rates are likely to remain relatively stable for now. Our forecast of the 10-year Treasury trading between 4% to 4.5% remains consistent, with inflation settling around 3%. 

Market Commentary 2/02/2024

Posted on by Damon Germanides

US Economy Defies Skeptics With Blowout Jobs Number

Skeptics grappling with conflicting data between the substantial increase in state unemployment figures and the recent non-farm payroll data were surprised by the blowout December Jobs Report. It showed that hourly earnings exceeded expectations, and the unemployment rate remained at a low 3.7%. Additionally, treasury yields surged, with the 10-year Treasury rising above 4% mid-day.

Today’s nonfarm payroll report highlights the strength of the US economy while also diminishing the likelihood of a Fed rate reduction in March. The Federal Reserve had recently met and signaled that a rate cut in March was improbable. The stellar earnings from companies like Meta and Amazon, as well as record highs in the stock market further suggest the overall health of the economy, making the Fed question if they should consider rate cuts in a seemingly robust environment. Better to keep rate cut powder dry in the event of a financial accident or deep recession.

Nonetheless, it’s essential to consider the backdrop of numerous layoff announcements. Despite the dominance of big tech companies in financial news, all is not entirely well in the broader economy. A significant regional bank experienced a 40% drop in its stock price due to issues related to its commercial real estate portfolio. UPS, often considered a barometer of economic activity, reported significant layoffs and plans to cut 12,000 jobs. While the exact timing of a potential negative jobs report remains uncertain, there are indications that the economy might be showing signs of weakness. This could lead to lower bond yields later in the year, though perhaps not as soon as initially anticipated by Wall Street.

Inflation is on the decline but may not reach the 2% target anytime soon. Hot wars in the Middle East and robust consumer spending are creating uncertainty on inflation. However, even with a baseline assumption of 3% inflation, the Fed still has room to cut short-term interest rates by as much as 1.00% to 1.5% from the current 5.25%. This would keep rates in a “restrictive territory” without harming the economy and the banking system. Lower rates would particularly benefit real estate activity. The expectation is that rates will trend lower come August.

One consideration for lower rates, even with elevated inflation, is the global surge in government debt, with the US being no exception at over $34 trillion in debt. The Fed is cognizant of this massive liability and might be compelled to lower rates to assist the Treasury in servicing the country’s bill. The size of the US debt is gradually becoming a prominent issue that cannot be ignored any longer.