Tag: jobs report

Market Commentary 3/31/2023

Posted on by Damon Germanides

Slowing Inflation Encourages Market 

While the recent banking crisis appears to be receding, there are still issues to be dealt with. Our belief is this will not become a 2008-type event, but the failure of SVB and Signature Bank has shown how fragile our banking system is as well as how quickly panic can set in. It only took two days for SVB deposit withdrawals to crater the bank. The long-term ramifications of these two bank failures will be felt in the form of more bank regulation and tighter lending standards. 

This Friday’s Core PCE reading, the Fed’s favorite inflation gauge, came in at 0.3% or 3.6% annualized. While this is still far too high, it is encouraging. However, the Fed remains resolute in its battle against inflation. They maintain their higher-for-longer stance on short-term interest rates. Their intention is to continue raising rates while the economy is still growing, and unemployment is low, as they fight inflation. We are not sure if this is the right decision, but history has shown that inflation is difficult to break once it is entrenched in the overall economy. This leads us to think that the Fed will keep short-term interest rates elevated for longer than many on Wall Street anticipate. Should these rates continue to rise beyond Wall Street’s expectations, volatility in the bond and equity markets will likely revive later in the year. 

Most of the news on loan defaults and property impairments is centered around office properties. Single-family residential loans are on solid footing. While valuations on single-family homes have fallen, they have not fallen dramatically. Many homeowners have locked in low long-term mortgage rates, potentially mitigating the need to sell.  This will act as a floor to price declines. Spring activity in housing is encouraging. We believe the worst is behind us, as clients adjust to the higher rate environment. 

Market Commentary 3/10/2023

Posted on by Damon Germanides

Treasury Yields Drop As Regional Banks Show Signs of Stress

Treasury yields dropped precipitously on Friday, but for all the wrong reasons. Several California-based regional banks experienced a sharp drop in equity values as customers withdrew money out of fear the banks may become insolvent.  Silicon Valley Bank (SV) was seized as it was forced to liquidate its bond portfolio due to a negative interest rate margin. In basic terms, this means the bank was paying more to depositors than to borrowers. Fear bled over to the First Republic and the Signature Bank as those stocks were down heavily. These episodes are the result of a decades-long easy money cycle that forced banks to buy long-dated bonds as well as lend money at near-zero interest rates. Additional uneasiness surrounds the fact that there’s never just one cockroach in the room – that these banks, unlike the banks of the 2008 Financial Crisis, are heavily regulated. As a result, they were supposed to have ample capital in reserves to protect against stressful scenarios. In the case of SVB, it still failed. Of further concern is the fact that SVB has been the bank to the most coveted part of the economy for the last 10 years. Their technology and their management team were presumed to be world-class. Yesterday I was telling a friend that the last two days were reminiscent of the Bear Sterns collapse. History does not repeat yet it often rhymes.  However, to keep this all in perspective, the big money center banks, or more bluntly, the banks that really matter from a systemic standpoint, maintain abundant capital reserves. So, while the SVB collapse is worrisome, I do not believe we are reliving 2008 all over again.

The Jobs Report came in a bit above expectation and wages grew slower. This takes the .50 basis point hike off the table (especially after today’s negative events in the banking sector). The Fed will most likely go .25 basis point at its next two to three meetings as inflation remains a problem but could change quickly. We assume the Fed funds rate to top off at 5.75% to 6.00% before turning the other way. There is a sense of apprehension in the air now and I think consumers, risk-takers, and business owners will continue to hunker down. Perhaps, the Fed’s work of raising rates to slow the economy and encourage a more cautious spending public is now at play.   Higher interest rates have already slowed real estate activity by making mortgages unattractive. They’ve also lowered commercial real estate values and are hitting equities now in a meaningful way. The pain of a slowing economy is beginning to take hold. 

What are we to do?  Business, real estate, and life have cycles.  Real estate is in an adjustment phase and prices (as we have reiterated) will need to adjust to the new era of higher interest rates. Anecdotally, many brokers I speak to realize that price reductions will lead to buyers returning to the table.  While not great news for sellers, this is the reality of a free marketplace.  The good news is the Fed is nearer to the end of the rate hike cycle than the beginning. Once there is consensus on a rate ceiling, the uncertainty of higher interest rates will dissipate, and activity will resume.  However, waiting for that time will not be without some additional distress, I am afraid.

Market Commentary 3/3/2023

Posted on by Damon Germanides

Strong Jobs Data and Inflation Increase Burden On Fed

After a grueling week of higher interest rates, some of Thursday’s Fed speak soothed the markets. As we have previously mentioned, we are not huge fans of the ceaseless opining that has become the norm from the Fed. We are often confused by Fed comments which tend to require clarification later on. 

We would prefer to focus on the data. Employment remains tight, as evidenced by weekly unemployment statistics and a very strong January Jobs Report. Although we are seeing many large corporate layoffs along with signs of a slowing economy, the unemployment data suggests the economy is much more resilient than many experts assumed. Inflation is also proving to be stickier. While some inflation will certainly be transitory, wage inflation and service inflation are less likely to fall. As the 10-year Treasury surged above 4.000% this week, bond traders are more accepting of the idea that persistent inflation could drive interest rates higher and make qualifying for a mortgage more difficult.

Higher interest and widening spreads are starting to negatively affect the commercial real estate markets, especially office spaces.  Lenders are becoming more selective in their loan decision-making process. We expect to see more and more defaults within the commercial space as the era of easy money comes to an end.  In the single-family home sector, activity on the eve of the busy spring buying season is showing signs of life. Nonetheless, volume is a far cry from the frantic pace of recent years.  Qualifying for a home remains challenging but we are seeing buyers change their expectations based on affordability. We assume that price adjustments will be required to close the gap between buyer and seller.

The deeply inverted yield curve is troubling to us and should be taken as a serious precursor to a recession. No one knows what type of black swan event is circling until it happens, but a sharp drop in interest rates amidst the realization the economy has stalled is one possible outcome in the coming months. Also, a slow grinding economy with fits and starts remains another possibility in what is being called a soft-landing outcome. The present moment can only be described as unusual. The economy seems to be slowing, but inflation remains high. Housing activity is at a multi-decade low, but wages continue to go up as employment remains tight. Only in time, will we know the true impacts of Fed policy.            

Market Commentary 2.24.2023

Posted on by Damon Germanides

Markets Rethink Inflation Amidst Fed Pivot

The quote “this too shall pass” may be apropos for the strain of higher inflation, higher interest rates, and increased volatility is having on all of us. For the mortgage market, it is an arm-wrestling match with interest rates, each day, in real-time. 

Unfortunately, our instinct has been that once inflation is left to run hot for longer, it infects all aspects of the economy and does not retreat quickly.  We opined recently that we were concerned Fed Chairman Powell’s press conference in early February was way too optimistic about the pace of cooling inflation. Also odd was the Fed’s belief that financial conditions were nearing a neutral level of tightening while most economists were seeing financial conditions ease up again.  All of this has now come home to roost with CPI, PPI, January jobs report, and PCE, all of which came in hotter than expected. It is now widely believed that the Fed will need to raise interest rates further while also holding rates higher for longer to ensure inflation is wrung out of the system.

Financial Reality: Recession, Rates, & The Grind

Regardless of the popular belief that rates will continue to rise for a longer period, we suspect that the economy may be in a recession. As a result, the higher cost of living is impacting spending, which may come through in the data sooner than later. Mortgage rates are certainly making it harder for borrowers to qualify for home loans as well as purchase or refinance commercial properties. Bank liquidity remains tight, credit card balances are soaring, and high-risk auto loans are rolling over. All are signs that the consumer is under pressure. The lagging effects of monetary policy take time and the thinking is that the jumbo rate hikes from last year take about 9 months to work their way into the system. Should the economy fall into an official recession, the Fed will be forced to lower rates. At what point the Fed rate hikes break something is unknown, but we are no longer in a low-interest rate market as interest has returned to a normal level. 

Our motto is that you must live in the world you are in, and not the one you want. Applying this to real estate means working much harder for much less, and seeing deals come and go. Again, we are of the firm belief that many prospective buyers are actively looking for a discount on the price to overcome the big increase in monthly mortgage payments. We are starting to see signs of more favorable negotiations between buyers and sellers, which is encouraging. For the deals that big banks refuse to fund, local banks are doing whatever they can to make common sense decisions on successfully closing such deals. The reinstatement of a busy market will take time. For now, it remains a grind. 

Market Commentary 2/17/2023

Posted on by Damon Germanides

Resurgent Inflation And Tight Jobs Market Raise Interest Rates

A better-than-expected jobs report combined with a hotter-than-expected CPI and PPI report has put the Fed back on its heels. There is now talk of a 50 bp increase in the Fed’s Funds Rate come March. The bond market seems to be reassessing inflation, pushing bond yields up across maturities. As we have written in previous posts, when inflation is allowed to run hotter for longer, it invades every nook and cranny of the economy. Fed Powell was presumed to relax last month based on his press conference about inflation. Unfortunately, there is more wood to chop, in the form of higher rates and more restrictive policy decisions by the Fed. We believe the Fed Funds Rate will not go much above 5.500%.

The US economy is proving to be very resilient. Although wonderful news long term, it is creating tension between the bond market, equity market, and Fed policy.  The Fed wants a slowing economy. This requires higher unemployment rates and lower levels of GDP growth. Higher interest rates have hit the real estate market quickly. So far, other sectors of the economy have not been as affected by tighter Fed policy. The extended endurance of higher rates will lead to price declines across all asset classes. Given the pent-up demand for housing in our main market, if prices fall by another 5% to 10%, we foresee a surge in real estate activity. 

Mortgage rates have enjoyed a few months of calmness. That period has ended momentarily, commensurate with the 30-year conforming mortgage rate climbing back to the upper 6.00% range.  With so many banks coming in and out of the mortgage market week-to-week, mortgage brokers serve a very important service. Insignia Mortgage works with over 30 institutions. Given the volatile market conditions, we speak to banks and credit unions daily and are able to stay highly informed on which lenders are aggressively priced and desirous to do business. 

Market Commentary 1/20/23

Posted on by Damon Germanides

Job Loss & Poor Housing Data Drive Mortgage Rates Lower

It is becoming increasingly difficult to argue that the economy is not slowing. Several major public companies, including Microsoft and Google, have announced layoffs. Now, most economists ally with the recession camp. Retail sales were very poor, existing housing sales are at a 13-year-low, the yield curve is extremely inverted, and long bonds are falling. Nonetheless, the Fed is resolute in raising short-term interest rates to eliminate inflation. Why, with so much negative sentiment, is the Fed dead set on doing this?  The answer lies in what the Fed is seeing in the job market and persistent wage growth. A survey of regional Fed data supports the notion that although wages are moderating, many parts of the job market remain tight and wage pressure has yet to soften. As wages constitute a large chunk of any company’s expenses, higher wages lead to higher prices, assuming the business can pass along those prices. 

Looking at the history of the economy, the Fed has at times, been truly unsuccessful in pushing down inflation. For example, the grim inflation episodes of the late 1970s and early 1980s led to several rate increases and declines. As a result, the Fed had to resort to very high short-term interest rates to finally quell inflation. We suspect that the Fed Chairman does not want to be remembered for failing to get the job done on inflation. He would rather see equity and real estate prices come down than risk a re-acceleration of inflation.

Even with the Fed’s rate hikes, and jaw-boning the markets constantly, financial conditions have eased since late last year. The 10-year Treasury is south of 3.500%, mortgage rates have dipped, and global equities have rallied. This is not what the Fed wants. Therefore, the Fed will be raising short-term rates yet again in early February. Odds are for a .25 bp increase, but don’t count out another .50 bp as their terminal rate target is above 5.00% (Fed Funds are currently at 4.25% -4.50%)

Distress in commercial real estate is starting to make it closer to the front page. There are about $175 billion in troubled loans globally, many of which are coming due later in 2023 and 2024 with the focus being on the office. Some residential areas like Austin and Boise experienced massive price appreciation during the pandemic and are now seeing prices come down. However, strong coastal market prices are holding steady. This is due to the combination of both a robust and diversified economy with low levels of inventory serving as a floor to steep declines. Mortgage rates have drifted lower. Lenders are now thinking about 2023 production goals on how to make loan requests work, especially on the portfolio bank side of the business. This is a welcome development and will certainly help the local real estate market.

Market Commentary 1/13/2023

Posted on by Damon Germanides

Interest Rates Drop As Markets Look Beyond Fed Hikes

First, the good news. Inflation is falling and it appears that the Fed is near the end of its tightening cycle. Odds are that the Fed will raise .25 bp in February and again in March before stopping. While inflation is still excessively high, shipping costs have dropped back to pre-pandemic levels, used autos prices have fallen, and other goods have followed suit. Gasoline prices are lower and the supply chain is functioning much more efficiently. The job market remains tight and that is still of some concern for the Fed. However, the pace of wage increases is lessening. Bond yields and mortgage rates have also lowered as the 10-year Treasury is now around 3.44%.  This has helped bring potential home buyers back into the market. 

Now, the not-so-good news. Negative ISM readings, surging credit card debt, an inverted yield curve, and warnings from CEOs such as Jamie Dimon on the state of the economy have all of us on “recession watch.” Generally, it is hard to bet against the U.S. consumer and business owner. Nonetheless, there are signs that consumers are tapping into credit cards more often to pay for life necessities, and business owners are cutting back on staff and hours of work per week. How this plays out over the next couple of months will be an important sign of where the economy is headed.

The hope remains the Fed will thread the needle and the economy may experience a very mild recession. The strong jobs market supports the no-recession argument, while other economic indicators suggest otherwise. The effects of the Fed’s jumbo rate hikes and quantitative tightening have yet to be discerned, as the monetary policy takes some time to work into the system. Lending standards at banks continue to tighten. The overall rise in short-term rates will affect consumers and business owners this year, as debt service costs increase quite dramatically for debtors who either have a floating rate debt or debt coming due.

Home builders reported soft sales volume. While many builders are offering incentives to lure buyers, builders are holding back on price cuts. Housing valuations have held up well and better than some expected. Why? The combination of a low fixed-rate mortgage, a 10-year + period of strict loan underwriting, and a big move-up in home values is keeping pressure on sellers to cut deals. Should the economy move into a recession later in the year, sellers will be more willing to negotiate or list their property for sale as their finances become strained. For the moment, although the housing markets are slow, the drop in interest rates has got buyers looking again. Given that home affordability is stretched, lower rates are needed to jump-start real estate activity. While interest rates are not likely to move to pandemic levels, our experience is that should mortgage rates settle in under 5.000%, borrowers will respond positively. 

Market Commentary 12/16/2022

Posted on by Damon Germanides

Recession Fears Escalate As Fed Holds Firm On Rate Hikes 

As anticipated, The Fed raised short-term interest rates by .50 bp on Wednesday. The initial market reaction was neutral, but sentiments changed once the markets digested the Fed’s resolve to fight inflation on Thursday. Additionally, the Fed emphasized its projection that short-term interest rates may go higher than expected due to the very tight labor market. The markets are concerned because the economy seems to be weakening. Major corporations have announced job cuts, credit card balances have risen, and U.S. retail and manufacturing spending has slowed. Market experts are attempting to reconcile how far the Fed is willing to see real estate and equity markets decline, rather than not do enough to squash inflation. The most vulnerable parts of society are hurt by inflation the most. Powell has referenced the need for “pain”(financial pain or the decline in asset prices) several times over the last many months as the unfortunate result of taming inflation.

Across the pond, European central bankers were also very hawkish about where interest rates will need to go to quell inflation. U.S. Treasury yields remain very volatile as expectations of tighter financial conditions loom. Speaking of bonds, the inverted yield curve is an excellent indicator of recession probability. How steeply the yield curve dips signifies to the bond market that a recession is likely.  However, a counterargument can be made for higher interest rates as liquidity is taken out of the system.  It seems logical investors will demand more yield for each unit of risk. Interest rates along the yield curve should move up. Also, onshoring of industrial production and pivoting from just-in-time inventory to certainty-of-inventory, employee demands for higher wages, as well as a low level of “total employed” are inflationary. In the end, the best financial advice this year has been to “not fight the Fed.”  The Fed wants positive real rates across the whole yield curve and fighting the Fed is usually not wise.  While no one can predict the future, we are in the midst of a paradigm shift in interest rates. The results of this shift will be felt in the coming year.

Interest rates have dipped slightly, and that has led to a small increase in activity. Winter has always been a historically slow time of year, but the jumbo hikes the Fed has undertaken have certainly slowed the market. With inflation coming down, the hope is interest rates will normalize and thereby help the real estate market. As 2023 approaches, lenders will have new funding targets, which should help as banks compete for new business. 

Market Commentary 12/2/2022

Posted on by Damon Germanides

Market Left In Speculation Re: Fed’s Next Move Amidst Stronger Than Expected Jobs Report

It was a very good week for stocks and bonds. Over the last couple of weeks, interest rates have been drifting lower (under 6%), bringing more borrowers to our local real estate markets. However, the better-than-expected jobs report will keep pressure on the Fed to continue its path of higher interest rates. Let me be clear, the rate of increase in interest rate will moderate. But for those who think interest rates are coming right back down, this Jobs Report should put those thoughts to rest in the near term. The reason is that wage growth remains strong and well above previous forecasts. Since employee wages make up for most companies’ largest expense, wage growth places great pressure on businesses to continue raising prices. While the Fed would like to see wage growth in the 2% to 3% range, today’s number of 5.60% was too high. Inflation can only come down so much with wages growing at this clip.  Additionally, with unemployment still under 4.00%, we anticipate another 50 bp increase in the Fed Funds rate when the committee meets later in the month.   

Some good news on the mortgage front.  Fannie/Freddie has now opened up their home loans to over $1 million in high-cost areas. This will help those borrowers looking to purchase in markets that may not have the perfect profile for a balance sheet lender. Fannie/Freddie tends to be less restrictive on post-closing reserves and credit at higher loan-to-values.  Also, as lenders adjust to the higher interest rates, we are beginning to see credit officers at local banks and credit unions approve exceptions with more regularity. A good sign for sure. 

Market Commentary 11/18/2022

Posted on by Damon Germanides

Mortgage Rates Continue To Fall In Uncertain World

Over the past several decades, the inverted yield curve has been a tried-and-true recession predictor. With some parts of the year yield at historically wide inversions, financial conditions are becoming too tight. This indicates a strong likelihood that the economy is slowly marching toward a recession. However, there is evidence to the flip side of this argument, including consistently strong employment data, decent capital spending by companies, and a rebounding stock market.

Housing has been hit pretty hard by the 4 super-sized rate hikes by the Fed, with more upset on the horizon with the additional hikes anticipated in December and early next year. The terminal rate should cross 5.00%. Some Fed officials have opined the need to go much higher to stomp out inflation.  A recent Fed study on housing speaks of the potential for a 20% adjustment to prices in specific markets.  Speaking to our market, prices will continue to come down, but the lack of inventory will set a floor for how low prices can go. As long as California continues to be a robust and diversified economy, wealth creation, weather, and opportunity will support prices better than some other parts of the country. Nevertheless, affordable housing remains a big problem on a national level, and the Fed will want to see housing prices fall. Such a decline won’t be as severe in the more undersupplied and desirable areas.

Important Update On Mortgage Products

Insignia Mortgage has located a few portfolio lenders willing to offer very sharp pencils on non-traditional loan products. These non-QM products rely on post-closing reserves more than income analysis.  Loan amounts go up to several million with a 30% down payment. Interest rates begin at 5.00% or so. We share this info because these types of products are crucial for the high-end markets, especially with the move in interest rates. Borrowers are struggling to qualify for loans due to the rapid rise in rates, and the fact that interest-only loans require an additional stress test, making it difficult for well-qualified borrowers to obtain financing.