Tag: Federal Reserve

Market Commentary 02/21/2025

Posted on by Damon Germanides

Persistent Inflation and Weak Economic Data Rattle Equity Markets

This week, weaker-than-expected economic data, tariff uncertainty, and a rise in consumer inflation expectations pummeled stocks. In addition, consumer sentiment fell short of forecasts. It’s important to remember that confidence is the cheapest form of economic stimulus. As we have written for over two years, persistently high living costs and elevated housing expenses are wearing down everyday Americans.

The general public isn’t reassured by inflation returning to 2%. Cumulatively, prices have risen above 20%, while wages have yet to catch up. Consumer dollars simply aren’t stretching as far as they once did. A particularly worrisome signal comes from Walmart’s disappointing financial results, despite the retailer’s history of benefiting from consumers seeking better value. Some analysts speculate this could be a sign that consumers are nearing their breaking point, as inflation continues to erode spending power.

Bond yields responded as expected, with interest rates moving significantly lower later in the week. Treasury officials clarified their stance on issuing longer-dated bonds, easing pressure on the 10-year Treasury yield. Since most financial debt instruments—including mortgages, commercial loans, and auto loans—are priced off the 5-, 7-, and 10-year Treasury yields, this decline is a welcome development. With the 10-year Treasury below 4.50%, we anticipate mortgage rates to decline in the coming week. 

As for the Fed, they remain in a wait-and-see mode. Recent inflation data suggests they may have acted too soon and too aggressively with their initial 50-basis-point rate cut. While short-term interest rates remain restrictive, they may not be restrictive enough to cool inflation. With markets holding up reasonably well, the Fed finds itself in a challenging position with both inflation and inflation expectations rising. The likelihood of additional rate cuts appears remote. If inflation data continues to come in hotter than expected, expect discussions around the potential need for a rate hike.

Market Commentary 02/07/2025

Posted on by Damon Germanides

Fed Remains On Pause Due To Jobs Report

Consumer Sentiment & Jobs Report

U.S. consumer sentiment declined as concerns over tariffs and the already high cost of living dampened confidence. The January Jobs Report indicated a slowing yet resilient labor market, with unemployment moving to 4%. Wage growth accelerated, contributing to higher bond yields, as rising wages put further pressure on inflation. Given persistent inflation concerns and a solid jobs report, the Fed will likely remain on hold for the foreseeable future.

As we’ve noted before, inflation doesn’t simply disappear. Once prices rise, they rarely decline, requiring wages to grow gradually over time to offset higher costs. However, the post-COVID inflation surge has created “sticky inflation,” the cumulative rise in the cost of goods and services will take years for incomes to catch up. This presents a key challenge for the Fed, reinforcing the likelihood of interest rates staying higher for longer.

Treasury & Interest Rate Outlook

Treasury Secretary Bessent signaled a focus on lowering long-term Treasury yields, particularly the 10-year, currently at 4.6%, rather than reducing short-term rates. However, the term premium between short- and long-term rates is already tight, limiting flexibility unless an inverted yield curve is the goal. His strategy appears to hinge on deficit reduction, energy cost management, and economic growth to bring long-term rates down, which could lead to lower short-term rates.

From our perspective, interest rates are not unreasonably high, given the current 3% GDP growth and 3% inflation environment. The bigger issue remains government spending, which likely contains far more inefficiencies than initially assumed. If spending is significantly reduced, bond yields could fall sharply. The effectiveness of this approach remains to be seen.

Market Commentary 02/01/2025

Posted on by Damon Germanides

Broad Thoughts On Economy, Real Estate & Direction Of Interest Rates

Market Volatility and Economic Trends

This past week saw significant market swings, with technology-focused equities taking a sharp hit on news that Chinese firm Deep Seek may have developed a more efficient and cost-effective way to use large language models. Nonetheless, U.S. equities rebounded by the end of the week, as buy-the-dip investors capitalized on lower entry prices. Mid-week, the Federal Open Market Committee (FOMC) convened, and kept short-term rates unchanged as expected, maintaining their wait-and-see approach. Bond yields remained flat following the announcement. However, late Friday, equities dropped lower and bond yields rose higher after President Trump announced new tariffs on a range of imports, with the markets reacting to the potential inflationary impact of trade restrictions.

Inflation and Housing Market Pressures

The Fed’s preferred inflation gauge, Personal Consumption Expenditures (PCE), met expectations. However, inflation appears to be flattening rather than falling, meaning that prices are still rising—aggravating the cumulative cost of living increases over the past several years. Housing costs have climbed alongside interest rates, creating an affordability crisis for younger home buyers, step-up borrowers, and empty nesters. Many homeowners remain reluctant to sell, unwilling to give up 3% mortgage rates in favor of significantly higher financing costs. This dynamic has stifled the existing home market while benefiting large homebuilders, who can offer mortgage buy-downs, build at scale, and outcompete smaller builders on cost.

Banking and Distressed Real Estate Opportunities

Anecdotally, some banks that anticipated lower rates by now are reassessing their approach to impaired borrowers. Higher input and financing costs and rising cap rates have made real estate investing challenging—except for those in private credit. If banks begin applying pressure, opportunities for distressed property acquisitions could emerge regionally.

Credit Markets and Speculation

Corporate interest rate spreads remain historically tight, suggesting too much liquidity chasing too few deals. The ongoing speculation in crypto, AI, and meme stocks further reinforces the idea that cash remains abundant in the financial system. While some industries—such as real estate, manufacturing, and autos— struggle due to reliance on low debt yields, many sectors appear largely unaffected by higher interest rates.

Market Commentary 01/17/2025

Posted on by Damon Germanides

Stock Market and Bond Yields Rally With Softer Than Expected Inflation Data

The stock market rose while bond yields retreated, as both the Producer Price Index (PPI) and Consumer Price Index (CPI) came in better than expected. After months of high financing costs, these favorable inflation reports provided some relief. However, it’s important to remain realistic about how low interest rates can drop, with the economy growing at 3% and inflation trending at 3%. Oil prices have climbed to nearly $80 per barrel, exacerbating inflationary pressures. On top of everything, the recent LA fires are projected to become the largest natural disaster in U.S. history. The event is expected to drive up insurance premiums nationwide, increasing financial pressure on many Americans who endured a 23% rise in inflation since January 2020.

We anticipate the 10-year Treasury yield to normalize between 4% and 5%. Hopes for significantly lower rates hinge on addressing the U.S. government’s mounting debt and deficit spending. Incoming Treasury Secretary Scott Bessent has voiced concerns about excessive government expenditures. If the government takes steps to streamline spending and improve operational efficiency, it could send a positive signal to bond markets. While significant cuts to federal spending seem unlikely, even modest reforms could help stabilize the bond market. There’s also potential for mortgage credit spreads to tighten, which could provide some relief for borrowers if Treasury yields remain elevated. Notably, the Fed’s recent 100 basis-point rate cuts have been offset by a corresponding increase in the 10-year Treasury yield, negating the intended benefits for borrowers.

Single Family Mortgage Rates

Despite elevated interest rates, several banks are keeping mortgage spreads over Treasuries tight. High-net-worth borrowers willing to establish banking relationships can still secure mortgage rates in the mid-5% range. For buyers in middle-income areas, some community banks are offering high-leverage loans near 6%. Additionally, niche products for self-employed professionals, including doctors and lawyers, provide financing up to 90%-100% with no mortgage insurance and flexible qualification criteria based on newer income.

Commercial and Business Loans

Entrepreneurs seeking financing for commercial real estate or business needs can expect rates starting at SOFR + 2.50%, with options for tailored structures such as limited prepayment penalties, cross-collateralization, and interest-only terms. Business loans are also available at Prime for borrowers seeking under $15 million.

Construction Loans

Construction financing remains available but challenging to secure. Rates for high-net-worth borrowers start at 6%, while multi-family construction loans begin at 6.5%. Private credit options offering higher leverage are available but come with rates starting at 9.25%.

This environment offers opportunities for savvy borrowers, but navigating the current market requires a strategic approach and careful lender selection. Insignia Mortgage is here to help with lending solutions.

Market Commentary 01/10/2025

Posted on by Damon Germanides

Wild Fires, Rising Rates & What’s Next For Housing

The recent L.A. fires are expected to become the costliest blazes in U.S. history. First-hand accounts from borrowers who have gained access to fire-ravaged areas in the Palisades and Malibu describe scenes that are nothing short of apocalyptic. Our hearts go out to the friends, colleagues, and clients who have tragically lost their homes. With the economic toll forecasted up to 50 billion and rising, the impact of these fires on the conscience of our residents in addition to the significant emotional and financial cost to rebuild, will be an unfortunate toll on our city.  Thoughtful work needs to be done to ensure the safety of our residents.  Plain and simple, our elected officials failed us.  We are better than this.

In parallel, we remain concerned about the Federal Reserve’s decision to lower short-term interest rates despite sticky inflation and an overall healthy economy. Speculative trading in high-beta AI stocks, cryptocurrencies, and meme stocks, combined with historically tight spreads on high-yield bonds, signaled that financial conditions weren’t as restrictive as many believed. Lamentably, this is proving true. The 10-year Treasury yield surged to over 4.70% from approximately 3.60% before the Fed’s jumbo rate cut in September. While the consensus expected the entire yield curve to drop alongside the Fed’s decision, the opposite has occurred. Factors such as the Trump administration’s “America First” policies and tariff threats appear to be inflationary while mounting national debt alarms the bond market. This presents both a challenge (consumers face the highest interest rates in over 30 years) and an opportunity (policymakers may be forced to address these issues).

The pressing question now is how these elevated interest rates and the rising cost of living will impact asset prices. If rates climb further, we anticipate a reset in both single-family and commercial real estate values.  The rising cost of living, combined with steep financing costs, has made homeownership increasingly unattainable. If the expectation of declining rates fades, downward pressure on home prices will be needed to attract buyers. In California, where Insignia Mortgage operates, higher insurance premiums in fire-prone (and highly desirable) areas will add further pressure. On the commercial side, equity in properties purchased at market value over the past few years has been significantly impaired, with higher cap rates and increased fixed costs eroding returns. Meanwhile, businesses and consumers alike face elevated loan costs as business and auto loans often track the 10-year Treasury, leaving interest expenses stubbornly high.

The equity markets to date have been resilient. However, as interest rates move up toward 5% at some point, equities will not be immune. With the S&P having risen 20% plus in back-to-back years, it is unlikely that the run-up in equities will continue. In fact, we would not be surprised to see the equity indexes move lower. 

Despite these challenges, there is hope. A pro-business administration may drive economic growth to help rebalance incomes against the higher cost of living that has persisted since COVID. From our perspective as a real estate lender focused on entrepreneurs, we’re observing mixed conditions across industries. Clients in technology and advanced industries are thriving, while others—such as plastic surgeons, retailers, and manufacturers who saw significant demand post-COVID—are now experiencing slowdowns.

An Uncertain Fed Rattles Markets

Posted on by Damon Germanides

As evidenced this past week, an uncertain Federal Reserve is never good for markets. Stocks tumbled on Wednesday following what’s been called a “hawkish cut.” Even though the Fed lowered the Fed Funds rate by a quarter point, the Chairman’s comments disappointed markets. Despite a strong stock market, sticky inflation, improved post-election consumer confidence, and historically tight credit spreads, the Chairman signaled only two rate cuts on the horizon for 2025.

We believe the recent rate cut was unnecessary, and waiting would have likely prevented the sharp sell-off in bonds. Ironically, the two sectors most sensitive to interest rates: real estate, corporations, and auto loans, are being hurt by the rise in long-term rates. Despite the lower Fed Funds rate (now at 4.375%), the 10-year Treasury has climbed above 4.5%, up nearly 80 basis points since the initial cuts, driving borrowing costs higher across the board.

Housing inventory appears to be slowly rising as elevated home prices and high borrowing costs deter buyers. Over time, we expect this to shift. Many clients are contacting Insignia Mortgage for help refinancing jumbo ARMs taken out five to seven years ago, as payment adjustments are in some cases doubling monthly payments. We anticipate this trend will gradually increase inventory and may help ease home prices in expensive coastal cities.

While liquidity in the banking sector remains tight, larger private banks are keeping mortgage spreads narrow, benefiting affluent borrowers looking to purchase homes. Unfortunately, average borrowers are feeling the squeeze, which could further strain the broader housing market.

Our primary concern is that the incoming administration’s pro-growth strategy, while positive for the economy, risks reigniting inflation. These concerns were somewhat tempered today when the PCE came in better than expected. However, many economic models have inflation increasing again in early 2025. We recommend keeping a close watch on the 2-year Treasury and oil prices as important indicators of where the rates may head. If rates rise beyond expectations, commercial real estate could face significant stress in 2025. However, the persistent housing supply shortage makes predicting housing price declines challenging.

Market Commentary 12/07/2024

Posted on by Damon Germanides

Bitcoin, The Fed, and Interest Rates

One might expect interest rates to be higher as financial markets surge, and speculative stocks and cryptocurrencies climb almost daily. While the November non-farm employment report exceeded expectations slightly, it was close enough to consensus to make a ¼ point Fed Funds rate cut likely later this month. Once again, the U.S. remains the global leader for investment, driven by ongoing challenges in Europe—such as the no-confidence vote in France—and the declaration of martial law in South Korea. These geopolitical issues have bolstered the “safe-haven” trade, contributing to lower domestic yields. That said, we would not be surprised to see interest rates drift higher given these economic and market tailwinds.

Current interest rate levels are not particularly restrictive, as financial conditions appear fairly loose. Spreads on corporate debt remain tight, and capital continues to flow into riskier assets. However, parts of the market are signaling excessive risk appetite. For instance, the use of leverage in cryptocurrency and meme stock trading is concerning, as it magnifies both gains on the way up and losses on the way down. The notion that markets can only move higher is worrisome (remember trees don’t grow to the sky), but momentum is currently driving trends upward and investors are feeling confident for the moment.

Impact on Real Estate

Today’s market environment is driving increased activity in the real estate lending space:

  1. Increased Loan Activity: Business owners, buoyed by post-election confidence, are reinvesting in their businesses, leading to more refinances and lines of credit.
  2. Active Homebuyers: Buyers who were previously on the sidelines are now actively searching for homes, encouraged by an improving economic outlook.
  3. New Loan Products: Banks, both large and boutique, are ramping up for 2025 with innovative loan programs to drive volume. Borrowers and lenders alike are eager to transact, creating optimism for the year ahead.

We remain optimistic about 2025, as both the demand for lending and the willingness of banks to provide capital appear to be aligning positively. Borrowers have accepted higher rates and the need to transact is trumping the need to wait for lower interest rates. 

Finally, please find below an article written by Insignia Mortgage’s co-founder, Damon Germanides, on the critical role of mortgage brokers in today’s market. At Insignia Mortgage, we dedicate significant effort to identifying unique lenders to meet the needs of our diverse clientele. We hope you find the article insightful:

Read the Article: Mortgage Brokers Will Excel With the Cheap Debt Era Over

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.