Tag: market trends

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.

How Low Will The Fed Go?

Recent Conversations on Rate Movements

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

Why the 50 Basis Point Cut?

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

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

Impact on Mortgage Rates

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

How Low Could Rates Go?

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

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.

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.