market commentary Archives - Page 13 of 17

Market Commentary 9/17/21

Posted on September 17, 2021 by Damon Germanides

Bond yields are under some pressure this week as the equities markets trade with renewed volatility and investors become more cautious. We also saw a mixed bag of economic reporting with some manufacturing data and retail sales coming in better than expected. Inflation remains a global concern and while the Fed remains in the transitory camp. For the moment, there is no denying that the cost of living has increased. Landlords are raising rents, costs of goods and services have surged, and while income has risen it is not keeping up with inflation for the average wage earner. The 10-year Treasury breached its 200-day moving average for the first time in many months. Fears of inflation and of the even more worrisome stagflation (slowing growth and high employment) are the topic of anxious conversation. Compounding matters are the 4 million people who have decided to leave the workforce permanently due to the Covid epidemic while help wanted signs are omnipresent and companies struggle to fill positions.

The markets are also digesting the administration’s new tax proposal which is focused on increasing tax rates on those who earn over $400,000. This new proposal will also increase tax on capital gains and place limits on how retirement savings, affecting primarily upper-income workers. Overall, I believe this plan is a negative for the equity and real estate markets as higher taxes mean less available funds would be freed up for investing in stocks and buying real estate. The impact will be felt especially in very expensive coastal cities.

On the housing front, San Francisco and other California cities are experiencing a surge in homes for sale. High home prices and high demand are encouraging sellers to list properties, a boon for prospective buyers. We will see if it continues. If yields move up, more supply will be needed to cool off buying frenzies. Tight home supply remains a major issue as the Covid pandemic has triggered supply chain issues and delays in home construction.

The market could be impacted by a recent development we noticed in the margins. A large Chinese development firm, Evergrande, has defaulted on billions of dollars of debt. While this will have little effect in the U.S., it could ripple out to multi-national banks that lent billions Evergrande. It is also a reminder of the consequences of what may happen when companies lever up to unreasonable levels and banks permit this to generate fees. Whether this is the first of many overleveraged Chinese developers to default is yet to be seen, but this story reminds me of what happened in the U.S. with Lehman Brothers, which started off as an isolated incident and quickly devolved into the Great Financial Crisis of our time.

Market Commentary 8/13/21

Posted on August 13, 2021 by Damon Germanides

Consumer Sentiment Dims As Rates Push Lower To End The Week

Interest rates dipped on a surprisingly negative consumer sentiment report which was the worst reading since 2011. The report was a surprise given the strength of the economy over the past many months and considering the positive trends in inflation, individual finances, and employment. Earlier this week, reports of tapering inflation were welcomed news to the stock and bond market. However, producer prices ran hotter than expected, so the direction for inflation remains a bit unknown.

Fed members have started talking about initiating bond tapering as we see improvements in employment, increased housing prices, and stronger personal finances. Some voting Fed members are pushing for a tightening of asset purchases in September. However, Fed Chair Powell has been adamant that he wants to run the economy hot for longer even with robust GDP growth and the highest inflation readings in years. A cross-current of thinking abounds on where we go from here, but a careful eye must be kept on the bond market in the coming weeks for signals on the overall health of the consumer and potential supply chain disruptions due to the Delta variant and impacts on retail in the US and globally.

Market Commentary 7/23/21

Posted on July 23, 2021 by Damon Germanides

Bond Markets Await Big Inflation Reading Next Week

Equity markets started the week with a big downdraft but have rebounded to new highs. Bonds dipped and then rebounded. This all supports the notion that we should expect to see more volatility in the coming months. While equity markets appear fully priced, the bond market’s paltry yields will continue to support riskier behavior. This will bode well for equities and alternative assets including real estate and private equity.

Central banks continue to reinforce low rates for longer as the Delta variant spreads and creates more uncertainty about the pandemic and how it will affect the reopening of the world’s economy.

Next week will be an important one as the Fed’s favorite inflation indicator, the core PCE, reports for June. Inflation is front-page news and the debates are ongoing about whether inflation is transitory or sticky. It will be interesting to see the responses from both sides on the current state of inflation. Bond yields will be on edge as it awaits this critical report.

Mortgage rates have held up well during this time. While it is hard to argue for lower interest rates as the economy improves, the Delta variant has increased the risk of a market setback which has helped keep interest rates low.

Market Commentary 7/16/21

Posted on July 16, 2021 by Admin

Refinances Surge As Bond Yields Drop

Bond rates continue to dip even as inflation readings run hotter than expected. It is true that some inflation appears to be transitory as evidenced by the expected drop in used car prices and the dramatic fall in lumber costs. However, other costs such as wage inflation are stickier and probably here to stay. Finally, housing costs, which have yet to fully appear in inflation readings yet, will begin to affect the report in a bigger way and should keep inflation readings elevated.

Another factor to consider is that the global central banks have pumped unprecedented amounts of liquidity into the market which has distorted all price discovery, including bond prices. Also, the U.S. interest rates remain some of the highest in the developed world. It is ironic that a country such as Greece has lower bond yields than the U.S. while being a much worse credit risk. Should the markets become untethered from the Fed’s belief in inflation being transitory, rates will move up quickly. The next couple of months will be very interesting and could lead to much more volatile markets. Potential borrowers who have not taken advantage of these ultra-low interest rates should do so while the window is still open. It is hard to imagine with such strong economic growth that the Fed keeps short-term rates pegged at zero for as long as originally projected.

As we move into the middle of summer, purchase and refinance applications remain robust. Low-interest rates continue to drive purchase-money business, but there appears to be a pause in-home price increases as we have seen a very healthy increase over the past year that is not sustainable. Lenders remain eager to lend and non-QM programs are helping borrowers who do not fit inside traditional banks.

Market Commentary 6/25/21

Posted on June 25, 2021 by Damon Germanides

Core Inflation Readings Push Yields Up
Core inflation came in hot, but not hotter than expected. Bonds reacted by pushing yields above up. However, within the report, spending slowed a bit in May and incomes flattened. A slowing in spending is good for the Fed. It will also allow them to continue to print money and prevent them from lifting rates quickly. However, assuming that pandemic-related illness rates in the U.S. continue to decline, the Fed will need to pull back on some of the extraordinary policies that were enacted to combat Covid’s impact on the economy.

Equities have responded well to the Fed’s messaging. A new infrastructure plan will create another boost to the economy and will create good new job opportunities.

Rising housing prices are beginning to create issues for borrowers, especially in the lower-income tiers, as the combination of rising prices and higher interest rates affect home affordability. If rates do move higher, housing prices will need to adjust.

Interest rates remain low but could move up sooner than expected if inflation is deemed more structural and less transitory by investors and economists. We continue to advise clients to take advantage of these ultra-accommodative interest rates and to lock in long-term financing as a hedge against inflation.

Market Commentary 6/18/21

Posted on June 18, 2021 by Damon Germanides

Fed Talks Of Tapering Drives Rates Lower – Go Figure

The Fed’s shift in policy acknowledged inflation is running hotter than expected. They also confirmed that the tapering of the Covid emergency policy responses was met with big inter-week swings in interest rates and increased volatility in equities. We will see if this change in Fed policy will create the so-called “Taper Tantrum” that we witnessed the last time the Fed tried to unwind its ultra-easy fiscal policies. However, with the 10-year Treasury around 1.500%, interest rates are still very attractive. This ultra-low interest rate environment has encouraged prospective buyers of all assets (stocks, real estate, crypto) to take on more risk either by buying real estate at elevated prices, purchasing stocks over bonds, or hedging dollar depreciation by buying alternative assets.

A lack of housing supply continues to nudge prices higher. However, affordability is becoming a big problem. If interest rates move up, there will need to be an adjustment in the supply and demand equation, and home prices will be under pressure. We are starting to see appraisals unable to come in at value on certain purchases. With the pandemic waning, perhaps buyers will not be so eager to stay in escrow, especially if the home does not appraise.

Non-QM or alternative lending is really picking up steam. Lenders are pushing products out to the non-traditional borrower in a manner I have not seen in many years. Thankfully, lenders are keeping the loan to values reasonable so borrowers still have real skin in the game. Loans to foreign nationals, no income verification loans, and asset-based loans are all back with a vengeance. Insignia is placing loans with many lenders and are closing transaction up to $15 MM with very low-interest rates and interest only. The search for yield is driving the products and it will be interesting to see what happens if interest rates rise.

Market Commentary 5/21/21

Posted on May 21, 2021 by Damon Germanides

Mortgage Rates Hold Up As Economic Recovery Continues

In another volatile week on Wall Street, cryptocurrencies crashed as much as 40% in one day before rebounding although Bitcoin remains down significantly from highs reached just a few weeks ago. Existing home sales slipped as home prices across the country hit all-time highs. Affordability will become an issue if home prices continue to surge. Inflation data is concerning but for the moment the bond market is in agreement with the Fed that inflation is more transitory in nature and will settle back down as the year progresses and the U.S. economy normalizes. However, if month-over-month inflation readings push higher, interest rates will spike quickly and the Fed will be forced to act. For now, the combination of ultra-low interest rates and global money printing is the tonic pushing some sectors of equities, real estate, and alternative assets to nosebleed levels. In my primary field of expertise, residential real estate lending, bidding wars on properties are stretching out prices even beyond what the property appraisals. While this is not common, it is happening frequently enough right now to warrant comment. Leverage levels in the equity markets are also very high. Caution is advisable in this environment.

However, banks and mortgage banks are pushing product like I have not seen in many years. While underwriting has loosened up, lenders are still doing proper due diligence and demanding a fair amount of borrower’s “skin in the game” which is keeping prices from being even higher. Many of our borrowers are highly qualified and the combination of low rates and a strong financial statement opens the door to incredibly low rates. Since interest rates are so low, prospective buyers of new homes are justifying the higher price against ultra-low monthly payments and jumping into the market. With supply so tight, buyers must act quickly or miss out on the property.

Looking ahead to next week, we have core inflation data, housing data, and personal spending data. All the important reports have given the markets’ jitters on inflation.

Market Commentary 5/14/21

Posted on May 14, 2021 by Damon Germanides

Mortgage Rates Still Attractive Even With Blow Out CPI Data

This was a wild week for market participants. Inflation readings were hotter than expected but really not a surprise given the massive amount of liquidity sloshing around and the economy experiencing growing pains as the U.S. reopens. Retail sales were strong, but not the blowout number many thought we would see. Perhaps this is a sign that consumer spending will slow in the coming years, which would help rein in inflation on product goods. The argument for goods inflation being transitory is that you can only buy so many new appliances, or upgrade your home throughout the year. Demand has been pushed forward due to the pandemic but now that households are stocked up on goods (think new Apple computer or a dishwasher), there will be some period of time before consumers need to replenish big-ticket items. However, costs to operate a business are up, as are prices for food and gas. Core material prices such as copper and lumber have risen hurting lower-income earners the most.

At the same time, wage inflation is also picking up, which is something the Fed policymakers want to see. It is unclear why there are so many job openings. Some reasons for people not taking better-paying jobs, especially on the lower end, could include stimulus payments that equal lower-end wages, child care challenges, and of course, the fear of taking on a risky more public-facing job while Covid remains a risk. The result of all of this is mass job openings for restaurant workers, retail sales, trucking, etc. Many employers are offering cash bonuses in efforts to hire. Margins are being squeezed which is forcing businesses to not only raise pay but also prices.

With all of the volatility in the marketplace this week, the 10-year Treasury bond has only moved up slightly. For the moment, bond traders are following the Fed’s expectation that inflation is transitory. One hot CPI report does not make a trend, but watch out below should the next few CPI reports confirm an uptrend in inflation. It remains to be seen if the Fed can have it both ways and can keep inflation on goods and services from running too hot while pushing up wage inflation. This is no small task and I have my doubts that it will happen.

Now is the time to take advantage of very attractive rates on mortgages. At some point as the pandemic fades into the rearview mirror, the Fed will need to adjust its ultra-monetary policy and interest rates will rise. The good news is that lenders are very hungry for business, and harder to place loan scenarios that have many options with fair to attractive rates and terms. In a world starved for yields, mortgages have been a great source of income for banks, insurance companies, and the government.

Market Commentary 1/15/21

Posted on January 15, 2021 by Damon Germanides

We are certainly in unusual times. One of the great joys of my job is speaking to people on a daily basis who are much smarter than me. While I understand why the housing market and equities markets have soared during the worst economic period since the Great Depression, it is not at all what I would have thought would have happened. Some great minds also remain perplexed by these events but chalk it up to massive synchronized central bank stimulus, artificially low rates, and transfer payments which have kept consumers spending. What scares the “smart money” is what could derail this momentum, and the most common answer is inflation.

When and if inflation pops the bubble is anyone’s guess, but with another $1.9 trillion stimulus package promised by President-elect Biden, we are reaching debt levels that are a bit scary. We understand why this needs to be done so we are not arguing against more stimulus, but we are worried about the repercussions long-term of all of this money printing.

With that thought in mind, our focus at Insignia Mortgage is how does all of this affect the mortgage market. Our feeling is that interest rates have seen the lows and that rates will gradually rise. The Fed is encouraging inflation while also telling us that they will control interest rates if rates move up too far. This relationship will work for some time, but should the combination of vaccine (we should have 4 vaccines by end of March) and herd immunity get our economy fully re-opened, I see no reason why interest rate benchmarks such as the 10-year Treasury note will remain at 1%. The one outlier is if the virus mutates and current vaccines become ineffective (to date the U.K mutation is not worrisome but the South African mutation is creating some concern), all bets are off. We hope for all of us that this scenario does not pay out.

Regarding individual loan transactions, we are biased toward locking-in rates which are at historical lows. The need for business has kept lenders working off of tight net interest margins which has helped affordability greatly as house prices have gone up fairly dramatically in some areas. Even if interest rates drop, many lenders have placed floors on the rates. Overall, our lending sources remain committed to making deals work and are doing all they can to help our clients during these tough times.

Market Commentary 1/8/21

Posted on January 8, 2021 by Damon Germanides

The December jobs report reflected an economic slow-down, which was no surprise given the spike in the virus around the country and the shelter-in-place orders that have displaced many small businesses. The slowing jobs picture also supports more stimulus and with a democratically-controlled government, there is no doubt the printing presses will be ramping up.

The combination of massive stimulus and very low interest rates has created asset inflation (think stock market and home prices). A rise in asset values has been a great benefit to the economy and has had positive effects on spending and sentiment during these most challenging times. However, while asset inflation has boosted 401ks and home values, wage and price inflation are becoming more of a concern as inflation expectations are rising and could create tensions in the financial markets. We think this is not of immediate worry, but massive money printing does have repercussions, and if inflation runs hot, it could disrupt the equity markets and real estate markets.

The 10-year Treasury breached 1% and touched the highest levels since last March. Rising rates hurt affordability for home buyers and also make riskier assets less attractive. Don’t get us wrong – as 1% 10-year Treasury is still very attractive; it still does not discount how far bond rates have moved off their lows. Should inflation continue to trend up, rates could move up quickly and banks will be quick to reprice. We are recommending to our clients to move while interest rates remain ultra-attractive.