Tag: market commentary

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.

Market Commentary 06/28/2024

Posted on by Damon Germanides

Reduced Rates On The Horizon As Housing Data Drifts Lower

Economic Data and Mortgage Lending Trends

Employers and economists alike continue to be challenged by the mixed bag of data presented by the economic landscape. Although a key inflation indicator emerged lower than expected, supporting the Fed’s belief that inflation is cooling, other reports like home sales, personal spending, and jobless claims have disappointed. Additionally, corporate earnings showed weakness, most evidenced by Nike’s significant miss. On top of that, declining furniture purchases underscore the ongoing difficulties of homeownership. The adage “as goes housing, so goes the economy” seems more relevant than ever.

The Fed faces a tough balancing act given the cumulative rise in costs for food, insurance, healthcare, and energy. The most vulnerable populations are suffering the brunt of these inflationary pressures. Lowering rates could help consumers but may also risk reaccelerating inflation, further impacting marginalized groups.

In the mortgage lending space, opportunities remain limited due to slowing sales and reduced refinancing activity. In response, banks, credit unions, and debt funds are sharpening their pencils on interest rates, specifically on residential 1-4 unit properties. Notably, Insignia Mortgage has identified a local lender offering stated income-stated asset home equity lines of credit. This lender focuses on credit scores and home values, with a maximum loan amount of $500,000 and combined loans on the property not exceeding 60%. The rate is prime +0.5%, offering a quick way to pay down credit cards and other expensive debt.

Indicators for Mortgage Rate Trends

Monitoring oil prices and the 2- and 10-year Treasuries provides insights into mortgage rate trends. Oil prices and interest rates are closely correlated, moving in tandem. The 2-year Treasury is a good proxy for shorter-term jumbo ARM pricing, such as 5-year ARMs, while the 10-year Treasury serves as a proxy for jumbo 10-year ARMs. Recently, with the 10-year Treasury down about 35 basis points, many jumbo lenders have lowered rates on their 7- and 10-year ARM products by about 25 basis points, offering a reliable estimate of rate direction and potential decreases.

Market Commentary 06/21/2024

Posted on by Damon Germanides

Housing Inventory Remains Tight As Mortgage Rates Drift Lower

Existing Home Sales: Trends and Insights

Existing home sales data has confirmed what industry insiders already knew: home inventory is extremely tight in many parts of the country. California is no exception. Home valuations continue to rise despite increased interest rates. There is growing optimism that interest rates have leveled off. Should rates drift lower, there’s a possibility for an increase in existing home inventory. Additional inventory could pressure sellers, but it would provide potential buyers more options across affordable, mid, and luxury home spaces up to $5M, significantly boosting activity.

The Rise of Non-QM Loans

Non-QM loans, typically offered by smaller banks, credit unions, and mortgage banks, provide more favorable guidelines, higher debt-to-income ratios, and interest-only products for borrowers who can’t qualify through traditional means. These “individual lending” loans do not rely on rigid guidelines. Instead, they focus on bank reserves, bank statement cash flow, foreign income, or rental income to qualify borrowers. Despite concerns about a repeat of 2008, these loans go through robust underwriting and require significant borrower investment, contributing to their strong performance since their introduction about a decade ago. Insignia Mortgage has identified non-QM lenders that are now comfortable with larger loan sizes up to $10M. 

Economic Outlook and Mortgage Rates

The economy presents a mixture of good and bad data. Technological advancements have created efficiencies, which some forecasters believe will lead to lower rates. However, input costs, commodity costs, and service costs remain high, hurting small business owners. Government debt remains a worry and needs to be monitored as the deficit continues to balloon. However, recent Fed comments have given the all-clear for banks to gradually lower rates. A+ borrowers will start seeing offers under 6%, and non-QM borrowers will find rates in the high 6’s to low 7’s, benefiting the existing home sales market.

Indicators for Mortgage Rate Trends

Monitoring oil prices and the 2- and 10-year Treasuries provides insights into mortgage rate trends. Oil prices and interest rates are closely correlated, moving symbiotically. The 2-year Treasury is a good proxy for shorter-term jumbo ARM pricing, such as 5-year ARMs, while the 10-year Treasury serves as a proxy for jumbo 10-year ARMs. For instance, with the 10-year Treasury down about 35 basis points recently, many jumbo lenders have lowered rates on their 7- and 10-year ARM products by about 25 basis points, offering a reliable estimate of rate direction and potential decreases.

Market Commentary 06/07/2024

Posted on by Damon Germanides

Stronger Than Expected May Jobs Data Pressures Bonds

We were initially encouraged by the JOLTS report which showed signs of a cooling economy as interest rates trended lower, earlier this week. However, Friday’s much better-than-expected May jobs report exceeded expectations for job creation and wage growth, reversing this trend. As a result, interest rates surged, and the likelihood of a Fed rate cut has been pushed to September. Those hoping for rate cuts are focusing on the rise in the unemployment rate to 4% as a sign of a subtly eroding economy.

While there are early signs of consumer stress, such as rising credit card balances and commercial real estate defaults, it is difficult to justify a near-term rate cut after today’s employment report. Cumulative inflation has been a significant drag on our most vulnerable citizens. However, the consumer remains in good shape overall. The stock market is at record highs, with a resurgence of FOMO, reminiscent of the Gamestock mania. We will listen closely to Chairman Powell’s insights on the economy and the direction of rates. The anticipated pain that Powell suggested would be needed to bring inflation down never fully materialized. With the upper 30% of the US population enjoying strong home price appreciation, stock market wealth, and rising wages, the loosening of financial conditions may stoke further inflation.

Trending In Real Estate Finance

Smaller banks and creative lenders are making exceptions on home loans that make sense. We are seeing some banks begin to waive income requirements for very liquid borrowers, increase debt-to-income ratio limits to 60% for the right profiles, and accept a credit blemish or two with a good explanation. Given the slowing existing home sale market, lenders who can lend are doing what they can to approve loans. This is significantly helping good borrowers secure home loans that they would have easily qualified for just a few years ago. Notably, interest rates remain range-bound, and lenders remain eager for business, with our best-priced lenders offering rates under 6% for well-heeled applicants.

Market Commentary 05/31/2024

Posted on by Damon Germanides

Rates Drift Lower As Inflation Data Matches Expectations

Despite a bumpy mid-week for bond yields, interest rates recovered following reports of slowing GDP and an as-expected PCE inflation reading. Additionally, a lackluster mid-week Treasury auction rattled the bond market, casting uncertainty amid ongoing US debt issuance. As discussed in previous analyses, a 10-year Treasury yield hovering around 4.50% appears justified with the current state of the job market, economy, and inflation. While the PCE number came in as expected, the real issue is inflation is not pushing lower and appears stagnant. 

High prices and interest rates have challenged housing affordability, resulting in declining home sales. Nonetheless, the recent surge in equities, particularly in the technology and AI sectors, has exceeded many market forecasts. This surge has notably impacted homebuyers in the $1.5M to $20M price range.

The unexpected rise in equities has contributed to a loosening of financial conditions, complicating the Fed’s stance on interest rate cuts. With the wealthiest 20% experiencing significant asset appreciation, including home and equity values, and high interest rates on their savings, the overall economic outlook remains positive. The consensus now points to one rate cut for 2024, a shift from earlier projections of up to seven cuts at the start of the year. In order to facilitate lower rates, one would need to see a worse-than-expected jobs report or some other major black swan. For now, the higher for longer projection remains intact.

Market Commentary 05/17/2024

Posted on by Damon Germanides

Balancing Act: Bonds Rally Amid Mixed Inflation Signals

It was another positive week for bonds as CPI data turned out to be cooler than expected. Inflation concerns eased with a slight dip in mortgage rates by about a quarter point on many products.

However, it’s premature to celebrate just yet, as PPI, or wholesale inflation, turned out hotter than forecast. While companies will always try to pass on input costs, sustained inflation makes transferring these higher prices to the end consumer increasingly challenging. Although a milder CPI print is encouraging, we anticipate the Fed may lower interest rates only once this year, especially given the recent Fed communications suggesting the unlikelihood of a July rate cut.

Despite unemployment being below 4%, a soaring stock market, and consumers still in relatively good shape, the Fed seems inclined towards a “higher for longer” approach with interest rates. There’s a concern that lowering interest rates may fuel animal spirits and exacerbate inflation. Notably, the resurgence of “Roaring Kitty” this week sparked a surge in option trading on some Meme stocks, indicating a shift away from restrictive financial conditions.

Nevertheless, there’s a strong desire to reduce interest rates. If unemployment softens and the unemployment rate hovers around the 4.5% range, then the probability of lowered rates becomes more likely. Lower interest rates would greatly benefit the US Government amidst record deficit spending and the need to fund these deficits with bond issuance.

Market Commentary 5/10/2024

Posted on by Damon Germanides

Declining Consumer Confidence Suggests Fragile Economy

We’ve perceived the economy as a mixed bag in the past year, diverging from the rosy outlook of many Wall Street economists. Although official employment and GDP figures indicate strength, the reality for many below the middle class suggests otherwise as individuals juggle multiple jobs to make ends meet. Inflation, often cited as a driver of nominal GDP growth, may be masking underlying economic challenges. This is evident in slowing sales for consumer-oriented businesses like McDonald’s.

Conversely, wealthier segments have thrived amid inflation, benefiting from appreciating asset prices and increased spending power. Nonetheless, recent consumer data suggests widespread struggles. Over the past 60 days, our mortgage brokerage and private lending business have witnessed a surge in requests for traditional and bridge financing, reflecting growing financial strain as the COVID stimulus wanes and inflation persists.

Now, the Fed faces a dilemma. Lowering rates risks exacerbating inflation, yet higher rates strain vulnerable citizens reliant on credit cards, mortgages, and loans. While a rate cut may be delayed until after the election, we’re increasingly optimistic about its likelihood, possibly in a significant manner. We foresee a Fed Funds Rate in the 4%-4.5% range by mid-2025, potentially bolstering the mortgage and housing markets and addressing yield curve inversion. Until then, the real estate sector must weather the storm.

Market Commentary 5/3/2024

Posted on by Damon Germanides

Fed Believes Inflation Will Decline Without Further Rate Hikes 

Markets found solace as the Fed committed to returning inflation to 2% without the need for further interest rate hikes. The April Jobs Report was disappointing while jobs growth came in lower than expected, pushing yields on Treasuries and mortgage-related products lower. April non-farm unemployment clocked in at 3.9% up a tick and hourly wage growth cooled, a data point that must stabilize for the Fed to begin lowering rates.  

The economy’s trajectory remains uncertain, compounded by the unprecedented government spending in response to Covid. The influx of funds continues to impact the economy in unforeseen ways, challenging traditional economic models’ predictive accuracy. 

Overall, the economy remains a mixed bag and is a fool’s errand predicting where interest rates and the financial system are headed.  Even the Fed, with a world of data and Ph.D.’s, has been wrong during the last few years. With trillions of dollars moving through our economy, many economic models were not designed to interpret this type of spending with accuracy.     

Keep an eye on the Treasury issuance as the Government has increased the money it will need to borrow for Government funding.  This may put a floor on interest rates overall.  However, for the moment a 10-year Treasury of around 4.50% feels about right given the uncertainty in the world.