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%