Tag: economic trends

Market Commentary 11/15/2024

Posted on by Damon Germanides

Market Yields Rise As Fed Signals Pause

Market and Economic Insights

Bond yields have seen a significant rise in recent weeks, with traders assessing the impact of President Trump’s pro-business, pro-spending agenda on inflation and the broader economy. While a strong economy supports higher yields, concerns over tariffs and a focus on on-shoring U.S. manufacturing are inflationary. At the same time, plans to expand domestic oil and gas production could counterbalance inflation. Worries over the growing national deficit and ballooning debt continue to push yields upward.

Inflation and Cost of Living Concerns

We’ve expressed concerns about inflation risks previously, and they remain. The cost of living has surged over the past few years, leaving many Americans struggling to keep up with price increases. Despite economists’ claims of cooling inflation, everyday expenses have risen significantly as incomes lag. This disconnect leaves many feeling uneasy about their financial stability.

Fed’s Policy and Market Reactions

The Fed is signaling a halt to further rate cuts in December. Currently, Bloomberg places the odds of a cut at under 60%, down from over 85% just a few weeks ago. A booming equity market, tight credit spreads, and a surge in cryptocurrencies suggest that financial conditions may not be as restrictive as the Fed has assumed. With market optimism running high, a pause in December is likely the prudent choice, even if it’s not ideal for real estate. However, the worst-case scenario would be another Fed pivot leading to a rate hike, potentially destabilizing markets further.

Outlook for Real Estate

Despite higher rates, there’s a silver lining for residential real estate. Private banks are offering competitive rates and sacrificing margins to attract business. Additionally, non-QM products are priced favorably compared to traditional A-paper loans, providing flexibility for borrowers eager to buy or refinance without being penalized.

We are also seeing an uptick in our commercial borrowers seeking floating-rate loans in the hope that rates will slowly decrease, at which point they could lock in a longer-term loan. As short-term rates are priced off of either short-term Treasuries or SOFR, these rates have seen a nice reduction.

Market Commentary 11/08/2024

Posted on by Damon Germanides

Markets Reaction To Political Shift and Fed Actions

The change in political leadership led to a sharp increase in bonds and equities, despite bond yields dipping slightly after the Fed meeting on Thursday. The initial rise in interest rates reflected optimism around President-elect Trump’s economic plans, which prioritize domestic growth and potential tariffs, intensifying inflationary pressure. Equities surged the expectation that a pro-business administration would focus on restoring American manufacturing and deregulation. However, there’s a disconnect between business optimism and voter sentiment, as polls show many Americans are concerned about their financial futures and are frustrated by high inflation.

We assess that the economy is moving forward, but a significant portion of growth is driven by government spending. Many clients report that the cost of living, particularly essentials like food, insurance, and education, is too high relative to income, even for the affluent. Economic data is mixed, often complicated by low response rates in surveys, leading to substantial revisions. For those expecting a recession, the resilience of the US economy has been surprising. It is widely expected that the Trump administration will bolster economic confidence, reflected in rising bond yields, especially the 10-year Treasury.

The Fed lowered interest rates by ¼ point, yet the outlook for future rate cuts remains uncertain. Chair Powell acknowledged that while inflation has moderated, its cumulative impact continues to weigh on many Americans. Prices for goods and services are likely to stay steady or increase modestly, necessitating wage growth for Americans to feel financially secure. Lowering short-term rates benefits those using business credit or credit cards. Additionally, the normalization of the yield curve with short-term rates lower than long-term rates is advantageous for banks. This could widen the yield spread between short-term ARM loans and longer fixed-rate debt. The rising long end of the bond curve is putting pressure on lower-end borrowers who rely on government-backed loan programs. Yet, rates may rise less than expected should the margin tighten between mortgage rates over Treasuries. In addition, higher long rates are putting pressure on commercial projects. This is because the 10-year Treasury discounts the minimum return on such projects plus some margin. 

Some Key Questions for the Coming Weeks:

  • If consumer and business confidence improves, will more prospective home buyers take the plunge into homeownership?
  • While long-term interest rates are likely to remain elevated, could a relaxation in banking regulations lead to more active lending? Will this shift in underwriting standards improve homeownership rates?
  • Will persistently high interest rates finally drive home prices down as sellers adjust to the end of a multi-decade bull market in bonds?
  • With government debt now at $35 trillion and rising, at what point will this debt burden start to significantly hinder economic growth?

Market Commentary 11/01/2024

Posted on by victoria chuidian

Bonds Yields Rise As Markets Brace for Election & Fed Meeting

Interest rates are on the rise as a weak Jobs report showed the addition of only 12,000 new jobs. Bond traders reacted unexpectedly to the news, with the market’s focus shifting to the growing U.S. deficit and the risk of persistent inflation. Of particular concern is the fact that neither presidential candidate has presented a plan to address the deficit, while the bond market appears to be signaling disapproval of continued government spending. With long-term Treasury yields rising since the Fed’s 50 basis point rate cut in September, we’re closely watching the 2-year Treasury as a proxy for next week’s Fed meeting. While a 25 basis point cut is anticipated, some experts suggest a pause might be more prudent, given the recent upward trend in rates and mixed economic signals

There’s an argument that current interest rates aren’t overly restrictive despite numerous factors like steady GDP growth, improved consumer confidence, a strong stock market, speculative crypto activity, tight underwriting, narrow bond spreads, and persistent wage inflation. For many individuals and businesses that secured historically low rates, recent rate fluctuations have had minimal impact. Additionally, with money market yields near 5% and rising housing and equity values, higher inflation may benefit wealthier Americans.

There may be an additional silver lining for real estate professionals. Many homeowners have held onto properties longer than planned, and home builders are running out of incentive options. If rates stabilize, home prices may need to adjust downward, which could entice prospective buyers off the sidelines.

Market Commentary 10/26/2024

Posted on by Damon Germanides

Mortgage Rates Edge Higher: What It Means for the Real Estate Market

Mortgage rates have edged higher as the economy remains resilient, while concerns over a potential rise in inflation linger. Consumer sentiment has improved, proving that the US consumer is tenacious, if nothing else. Nonetheless, credit card and auto loans have risen as consumers continue to feel the pressures of cumulative inflation. Housing activity, which is sensitive to interest rates, has started to stall as mortgage rates have moved up, causing prospective buyers to wait for a better entry point. Home builders are continuing to offer major incentives to buyers to move product and create buzz. If rates move further, we fully expect to see 2-1 buydowns and other incentives being mentioned in the Wall Street Journal as ways to attract prospective buyers. Lennar, a major home builder, recently disclosed that the buydowns and incentives combined amount up to $48,000 per home. That is a big number, especially since the average home Lennar sells costs $422,000.

There is still a silver lining, particularly for high-net-worth borrowers. Banks are still competing for top-tier clients, and those who qualify for private banking can secure loans in the mid-5% range. This is positive news for the luxury real estate market. Also, some smaller banks are looking at borrower financials more holistically and making commonsense decisions for borrowers with means. For first-time or lower-end borrowers, banks are offering very attractive terms to meet community lending requirements, including loans up to 100% financing with no points or mortgage insurance. These types of loans cap out at around $1M. 

Some very respected Wall Street traders have opined as of late on the potential mistake the Fed made by cutting rates by 50 basis points.  Their concern is centered around a good overall U.S. economy, low unemployment, and the return of animal spirits to the market as a result of the recent cut in interest rates. With US equities near or at all-time highs, Bitcoin and other speculative asset classes have soared. Credit spreads are tight and money seems abundant within the financial system.  For those borrowers not in real estate or other industries heavily reliant on debt, there has been less pain than imagined from the initial Fed hikes.  The big concern is if the Fed eases too quickly, that inflation will kick back up and they will be forced to raise interest rates again. This would be a very bad outcome for the respectability of the Federal Reserve.  Next month brings both a Presidential election and a Fed meeting, both events that we will be watching closely.

Market Commentary 9/20/2024

Posted on by Damon Germanides

How Low Will The Fed Go?

Recent Conversations on Rate Movements

Mortgage rates have been trending lower in anticipation of a potential Fed cut. The implications of recent interest rate movements have been the focal point of recent discussions between Insignia Mortgage and our network of clients, real estate brokers, and bankers. Of critical concern is the actual short-term rate cut at the Fed’s forward guidance, commonly referred to as the “Dot Plot.” This guidance signals what Chairman Powell described as a “recalibration” of interest rates, with the median Fed Funds rate projected to decline to 3.375% by the end of 2025, down from 4.75% today.

Why the 50 Basis Point Cut?

The Fed’s dual mandate is a delicate balancing act to maintain stable prices and robust employment. With signs of a softening labor market, the Fed has determined that lowering rates is necessary to realign the economic environment. Prior to the meeting, there was significant debate over whether the cut should be 25 or 50 basis points. Supporters of the 50 basis point cut argued that a slowing economy warranted more aggressive action, while proponents of a smaller 25 basis point cut highlighted factors such as record-high stock market levels, persistent inflation, ample liquidity, and a still-healthy 4.2% unemployment rate.

A 50 basis point cut is uncommon, and as this decision takes hold, some are questioning what specific data may have driven the Fed to take this larger step. The issue is whether the Fed sees economic weaknesses that the broader market may not yet fully grasp. The economic data remains mixed, with some indicators surpassing expectations while others underperform. Be reminded should inflation pick up, the Fed will be quick to respond, especially if the markets overshoot on rate expectations and animal spirits take hold.

Impact on Mortgage Rates

As anticipated, interest rates have been trending down ahead of the Fed’s decision and mortgage rates have benefited. Currently, mortgage rates hover between 5% and 6%, with some high-net-worth clients securing rates below this range. Lower rates could stimulate homebuyer activity and potentially motivate sellers, many of whom have held off due to high financing costs, to finally list their properties. This would provide much-needed relief to the housing market, which has been constrained by limited supply, high prices, and elevated interest rates. After nearly two years of multi-decade highs in mortgage rates, this drop offers welcomed relief to both the residential and commercial real estate sectors—industries that are highly sensitive to rate fluctuations.

How Low Could Rates Go?

Looking ahead, mortgage rates may settle between 4.5% and 6.5%, depending on the length of the fixed-rate period. Borrowers seeking short-term floating or adjustable-rate mortgages could see rates below 5% in the coming months as the Fed continues to ease short-term rates. However, several headwinds could keep long-term rates higher than some might hope. These include a growing federal deficit, the substantial government debt burden, large-scale financial commitments to green the economy, and the significant investments needed for businesses to adopt and integrate artificial intelligence to remain competitive.

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Market Commentary 08/24/2024

Posted on by Damon Germanides

Fed Pivot Helping To Lower Mortgage Rates

Quick Thoughts on the Economy:

On Friday, Jerome Powell confirmed what many of us already suspected—the Federal Reserve is planning to lower interest rates. There is now almost a 100% chance of a rate cut in September. As expected, equity markets rose and bond yields fell. However, it’s important to note that the Fed’s decision to signal lower rates is driven by concerns about the job market, suggesting the economy may be slowing.

This week, the Labor Department made a significant revision to its job data, revealing that nearly 1 million fewer jobs were created than initially reported. This revision may explain why consumer optimism is waning and why we’re seeing a slowdown in big-ticket items like autos, home improvement, and housing. The impact of lower interest rates on a slowing economy remains to be seen. Historically when the Fed first lowers rates, markets tend to become more volatile, and equities often decline.

Mortgage Rates & Housing:

Mortgage rates continue to improve as larger banks become more aggressive in anticipation of the Fed’s pivot. For high-net-worth borrowers, mortgage rates are approaching levels below 5%, which could significantly boost the high-end housing market. For the broader market, rates are trending lower, with many lenders offering deals in the high 5% to low 6% range—a major improvement from just a few months ago.

New home sales in July exceeded expectations, with existing home sales also showing improvement. Refinances have increased, likely because homeowners are looking for cash. With the substantial rise in home values, the cheapest form of debt remains on one’s home.

Indicators to Watch:

We are closely monitoring weekly unemployment data, the slope of the yield curve, oil prices, and consumer confidence, to gauge the overall health of the economy. While no one can predict the future with certainty, these indicators provide valuable insights into how aggressive banks might be with underwriting and rates, as well as the general mood of the market.

Market Commentary 08/16/2024

Posted on by Damon Germanides

Mixed Signals Push Mortgage Rates Lower

Input and consumer inflation continue to decline, indicating a strong week for the equity markets. It’s important to note that inflation is still rising overall. The cumulative effects of inflation remain a significant challenge for many working families. Retail sales exceeded expectations once again, highlighting the resilience of the U.S. consumer. Nonetheless, with rising credit card balances, reports of laid-off employees struggling to find new jobs, slowing travel, and low- to middle-income consumers running out of cash, there are growing concerns that the economy may be on the brink of a recession.

The decline in bond yields across the curve reflects concerns about the health of the U.S. economy. Even with lower rates, the housing market—particularly in the lower to middle segments—has not seen a significant boost. Homes are staying on the market longer and buyers are struggling to qualify for their desired properties. On the other hand, the upper end of the market remains active, as wealthier individuals enjoy cash generated in the equity markets and risk-free returns over the past few years.

The de-inversion of the yield curve, along with the rise in unemployment, has old-time economic historians on edge. When unemployment increases by 50 basis points (0.5%) or more from its low, it often signals that a recession is on the horizon. We’ve already exceeded that threshold with July’s unemployment reading.

This concern is echoed in conversations with business owners ranging from small operators to large family-run or private companies, with hundreds or even thousands of employees. While the challenges may not yet resemble those of a deep recession, the business environment is undeniably less fluid and more difficult than in recent years.

For those of us in real estate, there may be light at the end of the tunnel if interest rates continue to decline. Rates are finally dropping below 6% on many products, indicating hope that the worst may be behind us. Lower rates should provide much-needed relief to homebuyers across the market.

Market Commentary 08/02/2024

Posted on by Damon Germanides

Mortgage Rates Fall Significantly As Economy Shows Signs of Slowing

Mortgage interest rates have experienced a significant decline in response to signals the US economy may be slowing. Let’s explore what has changed over the past few months that’s impacting the direction of interest rates and the economy.

First, unemployment has been rising gradually, with today’s job report missing expectations and spooking the markets. The unemployment rate now stands at 4.3%, up from 3.5% just a few months ago. Additionally, the 2-10 year inverted Treasury spread, which was as wide as 100 basis points, has nearly de-inverted, indicating a high probability of recession. Oil prices have dropped into the low 70s, another important indicator of waning economic demand, as manufacturing consumption slows. Housing data recently softened, with home starts facing an unanticipated downside in June. While this week’s significant drop in mortgage rates should help the housing market, the cost of building and buying a home remains a challenge. Consumer debt has been growing, and consumer confidence has been negative. Finally, many large consumer-facing businesses have warned that consumers are struggling, with many putting food on credit cards and paying over time, which is not a good sign.

This week’s shake-up in equities is no surprise, and this type of volatility is something that investors must be willing to stomach from time to time. Momentum works both ways, and the combination of greed and momentum created complacency. Think about the state of the world and how equities have been able to shrug off bad news over the last 18 months. High beta momentum trades in AI stocks created both an expensive and complacent market, despite earnings estimates missing the mark. Corporations also attributed the current landscape to consumer fatigue, the impacts of cumulative inflation, and a more difficult business environment.

However, real estate professionals, brokers, and mortgage folks have been in a deep industry recession since the end of 2022. With the odds of a recession or a Fed error in not easing soon enough, interest rates have fallen, leading to better days ahead for those in residential real estate. Well-qualified borrowers looking for a mortgage should now see rates, depending on product type, down payment, and potential banking, ranging from 5.5% to 6.25%. This is significant news, as just a few months ago, mortgage rates were over 100 basis points higher. Borrowers requiring stated income or other more opaque products have seen rates move into the mid-6s to low-7s. Government loans have increased considerably, with 30-year fixed products now in the high 5s.

With interest rates trending below 6% and potentially headed to 5%, we expect to see a pickup in both refinances and potential existing home listings. Many homeowners who were married to their mortgage may reconsider a move up or move down as mortgage rates become more favorable.

Last thought. Technically speaking, bonds are very oversold and the move lower has been swift and violent so we are advising on locking-in clients who have active loan applications. 

Market Commentary 07/26/2024

Posted on by Damon Germanides

Mortgage Rates Move Lower With Cooling Inflation

Mortgage rates performed well this week as inflation showed signs of cooling. Next week, the Fed meets to share its outlook on the economy, the direction of interest rates, and inflation’s trajectory. This meeting is crucial, as there are warning signs that the economy is slowing, such as poor consumer confidence readings, and very high credit card balances. The cumulative rise in inflation has hit many hard and the average consumer is stretched thin. Nonetheless, the economy continues to chug along, as evidenced by the better-than-expected GDP reading this week.

Should interest rates fall further, you could see jumbo ARMs down into the mid-5% range, which is great news for the luxury market. For first-time home buyers or middle-market buyers, some community-based programs up to $1M are being offered with rates at or below 6%. Interest rates below 6% offer welcomed support to this market in qualifying for mortgages. Remember, it was not that long ago that mortgage rates were well over 7% and in some instances touching 8%.

With an election around the corner, it will be fascinating to see how the Fed navigates the next two meetings. The Fed aims to remain politically agnostic, so there is a low probability that the Fed may cut rates in July to avoid influencing the election. While we believe interest rates are restrictive, we are not convinced the Fed is ready to make the final cut. One look at how equities bounced back this week illustrates how much liquidity is still in the market. Also, corporate spreads remain very tight, suggesting too much money is chasing too few deals. However, market momentum pushes yields lower, and we will take it.

Market Commentary 07/12/2024

Posted on by Damon Germanides

Jumbo Rates to Drop as Inflation Data Boosts Market Confidence

Thursday’s encouraging inflation data sent equity markets soaring, making future interest rate cuts almost certain by September and no later than November. For those in real estate and mortgage origination, the 4.65% to 4.45% drop in the 2-year Treasury is significant and should result in numerous banks lowering jumbo interest rates next week. Conforming and government loan products are also enjoying better pricing. The combination of reduced inflation, rising unemployment, and stalling consumer confidence, is helping to lower yields on the longer end of the yield curve.

While the CPI print was well-received by the markets, PPI (or wholesale inflation) surprised a bit to the upside, suggesting that inflation is not dead and could reaccelerate later in the year.  Of importance in the CPI reading was the attention paid to the owner’s equivalent rent, a lagging indicator and a main component of CPI. Although this reading came in soft, the indicator lags by 12-18 months, and there are many other signs that rents are starting to rise. Finally, huge deficits, geopolitical tensions, and massive spending all support the notion that inflation may not return to the 2% target. The United States and the free market economy have historically benefited from a complex and uncertain world, lowering bond yields.

Real estate experts are beginning to agree with an idea we shared a while back: if interest rates fall, inventory may rise. As a result, lower interest rates may lead to lower prices and increased activity as buyers have more property options, contrary to what we have all been taught. Since COVID-19, many economic principles have not made sense. Here are just a few thoughts:

• Higher rates for longer should have led to a lower stock market.

• Higher rates for longer should have led to lower housing prices.

• Commercial property defaults should have crippled regional banks by now.

• High Fed Funds should have seen inflation drop more than it has by now.

• An inverted yield curve is an ominous sign of recession.

None of this has happened. For housing, the longer people stay in their homes, the more inventory builds up. For those in real estate who can survive to 2025, there are signs that the overall residential market is getting much busier. This would be a welcome sign for us all.