Tag: market trends

Market Commentary 3/15/2024

Posted on by Damon Germanides

Hot Inflation Data Takes The Shine Out of Bonds

Hotter-than-expected CPI and PPI data caused bond traders to adjust their expectations on Fed rate cuts, causing a decline in US Treasuries. Despite a decent jobs report indicating continued hiring, many Americans are taking on multiple jobs to cope with rising costs. For example, everyday goods are significantly more expensive than pre-Covid times. On top of that, job creation has been predominantly driven by necessity rather than productivity-enhancing employment.

Nevertheless, the economy displays resilience amidst many negative factors, including credit card and auto-loan defaults, geopolitical tensions, and oil prices hovering around $80 per barrel. Speculative investments in AI, daily options, and crypto remain robust. Such data suggests that financial conditions may not be as tight as anticipated, potentially leading to Fed rate cut disappointments. Although rate cuts would be welcomed, market dynamics currently support a narrative of 1-3 cuts rather than the 6 cuts expected at the beginning of the year. We should gain more clarity on the path of interest rates next week when the Japanese and US Central Banks meet. Japan is expected to move away from negative interest rate policies. 

Despite the rise in Treasuries, mortgage rates remain relatively stable. Banks and financial firms continue to maintain razor-thin margins in an increasingly competitive market. With refinance activity at a 20-year low, success in today’s mortgage market hinges on strong relationships with realtors and financial planners.

Although many homeowners benefit from low-rate mortgages, other expenses such as credit card interest, insurance, margin debt, and household costs continue to rise. The prolonged period of low interest rates has led to an accumulation of homes, with homeowners staying put longer than historical norms. However, signs suggest this trend may be shifting. According to Zillow in February, homeowners in some regions are increasingly likely to list their properties for sale. 

Regarding the recent NAR settlement and its potential impact on commissions, no lenders have yet offered financing options for buyers. This significant ruling is expected to reshape buyer-seller interactions in real estate transactions, and we will continue to monitor and provide updates as necessary.

Market Commentary 03/01/2024

Posted on by Damon Germanides

How Non-Traditional Mortgages Are Benefiting From Animal Spirits

Speculation and momentum are driving many public markets, from cryptocurrencies and zero-day options to companies at the forefront of AI. Even non-fungible tokens are seeing renewed interest. Investors seem willing to take on more risk for less reward, as evidenced by compressed bond and equity spreads. Expectations of higher interest rates persist, yet animal spirits remain strong, suggesting that financial conditions may not be as tight as feared. The outlook for rate cuts has diminished. Renewed discussion by economists indicates the possibility of only one expected cut (the consensus of 3 cuts remains).

Interestingly, in the residential mortgage market, non-traditional lenders are competitively pricing single-family, mortgages. Borrowers with some income documentation, good credit, and a larger down payment, may secure mortgages at rates in the mid-6s. This represents a significant improvement from just a few months ago, particularly for non-QM products catering to less traditional borrowers. Also, these lenders continue to raise jumbo loan limits. These products, only slightly higher in interest rate than traditional loans, support real estate and mortgage brokers in their accessibility. 

A recent bullish publication featured balloons floating into the sky, which may indicate a sign of market exuberance. Front-page stories often precede market peaks, and while we say this half-heartedly, it’s worth noting. Despite potential headwinds such as geopolitical tensions, higher oil prices, and persistent inflation, the market seems to be discounting them for now. If sentiment turns, bonds could rally. This would push mortgage yields lower right in time for the spring buying season.

Market Commentary 02/23/2024

Posted on by Damon Germanides


The Promise Of AI & How It Will Affect Real Estate

As the promises of artificial intelligence (AI) and machine learning continue to propel equity markets, significant transformation lies ahead for various industries, including the mortgage business. While this shift may evoke both excitement and apprehension, embracing AI-driven processes offers the potential for increased efficiency, streamlined operations, and enhanced profitability.

But why is a real estate newsletter delving into the realm of AI? The answer lies in recognizing AI as a disruptive technology poised to revolutionize our lives akin to milestones like the automobile and flight. Moreover, it serves as a deflationary force, gradually reducing costs across goods and services.

In the context of residential real estate and mortgage origination, AI has the potential to identify promising prospects within each of our networks by leveraging vast computing power to assess probabilities. For realtors, AI can pinpoint prospective buyers or sellers based on life circumstances or shifts in employment status and provide real-time triggers. 

This forward-looking optimism in the market has implications for interest rates, likely keeping them elevated for longer periods due to positive economic outlooks. As equity markets surge and financial conditions ease, individuals are inclined to spend more. Such increased activity prevents inflation from being lowered, delaying the anticipated rate cuts by the Federal Reserve. Consequently, interest rates have risen, with conforming loans hovering in the mid to upper 6% range, and jumbo loans around 6%.

In line with our assessment, a major Wall Street research firm has reached a similar conclusion: the overall expense of retaining a home you no longer desire is likely to bolster existing inventory. This is particularly true with rents on the decline and so many multi-family units becoming available. Such a trend has the potential to ease some of the strain on housing affordability and open up fresh opportunities in the real estate market.

Market Commentary 2/02/2024

Posted on by Damon Germanides

US Economy Defies Skeptics With Blowout Jobs Number

Skeptics grappling with conflicting data between the substantial increase in state unemployment figures and the recent non-farm payroll data were surprised by the blowout December Jobs Report. It showed that hourly earnings exceeded expectations, and the unemployment rate remained at a low 3.7%. Additionally, treasury yields surged, with the 10-year Treasury rising above 4% mid-day.

Today’s nonfarm payroll report highlights the strength of the US economy while also diminishing the likelihood of a Fed rate reduction in March. The Federal Reserve had recently met and signaled that a rate cut in March was improbable. The stellar earnings from companies like Meta and Amazon, as well as record highs in the stock market further suggest the overall health of the economy, making the Fed question if they should consider rate cuts in a seemingly robust environment. Better to keep rate cut powder dry in the event of a financial accident or deep recession.

Nonetheless, it’s essential to consider the backdrop of numerous layoff announcements. Despite the dominance of big tech companies in financial news, all is not entirely well in the broader economy. A significant regional bank experienced a 40% drop in its stock price due to issues related to its commercial real estate portfolio. UPS, often considered a barometer of economic activity, reported significant layoffs and plans to cut 12,000 jobs. While the exact timing of a potential negative jobs report remains uncertain, there are indications that the economy might be showing signs of weakness. This could lead to lower bond yields later in the year, though perhaps not as soon as initially anticipated by Wall Street.

Inflation is on the decline but may not reach the 2% target anytime soon. Hot wars in the Middle East and robust consumer spending are creating uncertainty on inflation. However, even with a baseline assumption of 3% inflation, the Fed still has room to cut short-term interest rates by as much as 1.00% to 1.5% from the current 5.25%. This would keep rates in a “restrictive territory” without harming the economy and the banking system. Lower rates would particularly benefit real estate activity. The expectation is that rates will trend lower come August.

One consideration for lower rates, even with elevated inflation, is the global surge in government debt, with the US being no exception at over $34 trillion in debt. The Fed is cognizant of this massive liability and might be compelled to lower rates to assist the Treasury in servicing the country’s bill. The size of the US debt is gradually becoming a prominent issue that cannot be ignored any longer.

Market Commentary 12.15.2023

Posted on by Damon Germanides

Fed Forecast To Bring Down Rates Pushes Mortgage Rates Lower

The recent dovish pivot by the Federal Reserve, along with projections of up to three rate cuts next year, brought a sigh of relief to the markets. Equities, bonds, gold, and oil, all rallied in response. This shift by the Fed signaled a so-called “soft-landing” narrative. Inflation data has been pointing toward lower inflation as the economy continues to move forward with weak manufacturing data, but a strong service sector.

Mortgage rates also saw a significant drop, with 30-year mortgages now below 6.50%, and adjustable-rate mortgages anticipated to dip below 6%. This is a remarkable change from just a few weeks ago when mortgage products were touching 8%. Let’s delve into the reasons behind this sudden change of heart by the Fed and the markets.

Inflation Trends

Consumer and producer inflation data have been showing positive trends for quite some time. With inflation on the decline, the Fed Funds Rate, currently at 5.37%, stands well above the inflation rate (CPI) of 3.1%. This significant spread is viewed as restrictive, and now the Fed must consider if keeping rates higher for an extended period might do more harm than good. Additionally, signs of a slowing economy are emerging, which further supports the case for lowering interest rates.

Inverted Yield Curve

The yield curve has been inverted for an extended period, and the Fed would like to see it normalize. This normalization would benefit lenders who borrow short and lend long. When long-term interest rates are lower than short-term interest rates, it becomes challenging for lenders to generate profits due to the negative spread. A robust economy requires lenders willing to extend credit. Moreover, the massive US debt and the costs associated with servicing that debt become unsustainable at higher interest rates.

Quantitative Tightening (QT)

The ongoing QT (Quantitative Tightening) may provide the Fed with some flexibility to lower short-term interest rates and allow bonds to run off their balance sheet. Over the past decade, global central banks’ money printing and bond buying have led to enduring issues, as the cost of money became distorted. By lowering the Fed Funds Rate while continuing QT, the Fed remains somewhat restrictive but with a bit less tightening.

Nonetheless, we still anticipate a 10-year Treasury yield north of 4% and encourage clients to pursue financing at these current rates. We believe that the journey from 3% to 2% inflation will be challenging, and the so-called neutral rate of interest will likely settle above 3%. When you add a term premium of 1% to 1.5%, that’s where the 10-year Treasury should find its equilibrium.

10 Year Treasury & Employment

As previously stated, we continue to anticipate a 10-year Treasury yield north of 4% and encourage clients to pursue financing at these current rates. We believe that the journey from 3% to 2% inflation will be challenging, and the so-called neutral rate of interest will likely settle above 3%. Employment remains tight and wages appear to be sticky (and possibly rising again) which will continue to be monitored by the Fed. This could inhibit interest rates from going much lower than current levels.

For the moment, we will take the late-year gift from the Fed of the prospect of lower interest rates which is leading to a big pickup in borrower inquiries.

Market Commentary 12.8.2023

Posted on by Damon Germanides

A Quick Read On Rates, Jobs And Housing

A better-than-expected November Jobs Report took some shine off the recent rally in bonds, which had been surging over the past few weeks. The report was positive, but not great, although it did surprise Wall Street as both new hires and unemployment beat economists’ estimates. Something that is of particular concern and a focus of the Federal Reserve is the slight acceleration in wage growth, adding to some uncertainty about when the Fed might change its stance. The direction of interest rates from here is anyone’s guess, but the stronger-than-expected jobs data likely keeps the Fed in the “higher for longer” camp, at least in our opinion.

Anecdotal evidence suggests that the economy might be slowing, based on reports from local business owners. However, this has yet to translate into jobs data or consumer spending. Inflation, while still at elevated levels, seems to be moderating. Nonetheless, high credit card balances, rising delinquencies, and the overall high cost of debt are indications that consumers are feeling some pressure. Despite these concerns, GDP and other economic indicators still point to the economy being in reasonably good shape. Overall, the prediction suggests that the path ahead is challenging.

Turning to the housing market, activity in the existing home market, particularly in Southern California, appears to be picking up. Interest rates have fallen to under 7%, and some well-qualified borrowers are securing rates as low as 5.875%. This has prompted buyers to reenter the market, taking advantage of small price reductions and more reasonable interest rates. Large-scale home builders are employing various strategies to attract buyers, including helping first-time home buyers qualify for mortgages. Although construction loans from banks remain subdued, the private lending market is bustling, offering more expensive financing with greater leverage, something most developers need to initiate projects.

While there has been a downward trend in interest rates, it’s important to note that we may have reached a bottom, at least for now. A few additional thoughts on this matter; first, the Bank of Japan is likely to move away from its negative interest rate policy, which could exert pressure on bonds worldwide. Second, assuming a 3% inflation rate and real economic growth of 1.5%, the 10-year Treasury rate could stabilize around 4.5%, give or take 0.5%. Finally, it’s worth mentioning that historical interest rates have averaged significantly higher than current rates. While the recent rate increases have caused discomfort, part of the pain is due to the steepness of the rate hikes and the extended period during which rates were held at arguably too low levels. Looking ahead, if the spread over treasuries narrows, it’s conceivable that mortgage rates could range from the high 4s to the mid-5s in 2024, potentially providing significant support to the real estate market.

Market Commentary 12/01/2023

Posted on by Damon Germanides

Both Bonds & Stocks Rally Into December

November marked an exceptional month for both bonds and equities. Just a few weeks ago, interest rates surged above 5% and sent mortgage markets into a frenzy. Fast forward to today, and we’re witnessing the 10-year Treasury hovering around 4.25%. In addition, lenders are beginning to reduce interest rates. If this trend persists (we discussed this in previous commentaries) mortgage rates in the mid-5% range could become a reality. This is expected to entice buyers who have been sitting on the sidelines, as more affordable mortgage payments beckon.

Having said that, it’s essential to consider the reasons behind this decline in rates. One perspective is that the market anticipates the Fed will lower short-term interest rates next year as inflation subsides. While there’s cautiousness surrounding inflation, given its deep-seated presence in the economy, the consensus leans toward a more extended timeline to control it. Nevertheless, dovish Fed statements, coupled with moderating inflation data, have relaxed financial conditions as evidenced in the lower interest rates and now flourishing stock market. While there’s optimism that the Fed will engineer a soft landing, reflecting Wall Street’s current sentiment, the recent rally underscores the market’s exuberance. Our concerns are centered around the possibility of eased financial conditions rekindling inflation.

Another narrative suggests that interest rates are declining as bond traders assess the broader economy, indicating an economic slowdown. Assuming a 3% inflation rate and 1.5% GDP growth, a 10-year Treasury around 4.5% appears plausible. For now, the downward rate movement should be acknowledged and leveraged, given that borrowing costs have decreased by 0.50 to 0.75 basis points across the board. This is a significant development.

This year, regions primarily driven by the existing homes market like Southern California have faced challenges. Recently there has been a significant uptick in activity over the past few weeks, encompassing refinance, purchase, and construction loan requests. The drop in interest rates is fostering momentum, and we are encouraged by the resurgence of inquiries. After a challenging year, it’s heartening to hear the phones ringing again. To hear borrowers express enthusiasm about the prospect of interest rates stabilizing at acceptable levels. A welcome development timed for the holiday season. 

Market Commentary 11/17/2023

Posted on by Damon Germanides

Mortgage Rates Ease as Inflation Data Arrives Better Than Expected 

Interest rates continue to settle around 4.500% on the 10-year Treasury, with emerging signs of easing inflation and potentially achieving a soft landing for the economy (meaning no recession or a mild one).  Having observed the markets for a considerable time and recalling the challenges the Fed faced wrangling inflation in the 1970s and 1980s, we maintain a cautious stance. We believe the Fed will keep rates higher for an extended period, even though they are likely done with rate hikes for now. 

We are closely monitoring Treasury issuance, given that the US debt load exceeds a concerning $33 trillion. Managing this massive debt ultimately depends on the reduction of interest rates over time. Hence, it is imperative for the Fed to navigate the inflation challenge skillfully. Should they ease too early, there’s the risk of rapid inflation, necessitating rate hikes and possibly the destabilizing of the global economy. Conversely, tightening too much could squeeze businesses and banks, possibly harming the economy unnecessarily. 

The recent drop in interest rates is a welcome development. As we previously mentioned, there’s a chance for adjustable-rate mortgages on residential real estate to settle below 6%. Such a move would be highly beneficial for housing and commercial real estate. With the recent rate decline, our office has witnessed an uptick in larger purchases as buyers cautiously re-enter the market. While underwriting remains challenging, some lenders are making sensible decisions for well-qualified borrowers. Additionally, smaller banks, in their quest for loan volume, are willing to forgo income documentation for borrowers with strong credit, at least 40% home equity, and a willingness to deposit funds with their bank. 

Housing, however, continues to face challenges. Homebuilder sentiment dipped when mortgage rates briefly touched 8%. Housing starts remain sluggish as construction lenders remain cautious and concerned about construction costs as well as affordability. We’re also detecting a broader economic slowdown, influenced by higher interest rates and a 30% surge in most goods prices over the past few years, just as pandemic stimulus funding tapers off. Nonetheless, low unemployment and the resilience of the US economy should not be underestimated. 

Market Commentary 11/4/2023

Posted on by Damon Germanides

Fed’s Commentary Eases Bond Market As Yields Fall

Both bond prices (yields move inversely to price) and equities moved higher this week. This event was spurred by what many believe to be the end of the Federal Reserve’s rate-hiking cycle. Unemployment and manufacturing data came in worse than expected. When coupled with the commentary on rising subprime auto delinquencies, signs indicate that consumers, especially those on the lower end, are reaching their financial limits. It’s hard to believe that less than two weeks ago, the markets were quite worried about the 10-year Treasury touching 5%. However, the all-important 5% threshold was breached but never did close above that critical level.

In this classic “bad news is good news” situation for both bonds and stocks, the markets have found comfort in the 10-year falling back down to around 4.5%. Assuming the 10-year stays at this level, and that mortgage term premiums shrink, it is not impossible to see mortgage rates in the mid-5s. This would be welcomed news for mortgage originators and real estate brokers alike.

It is important to note that the volatile moves in US government bonds are not healthy, which makes lending decisions quite difficult. Watching bonds move over 50 basis points in three days is rare and emblematic of the varying views on economic and geopolitical risks. The relaxation of bond yields suggests that traders were either expecting a much more hawkish Federal Chairman, that geopolitical risks are rising, or that the economy is deteriorating, as supported by the fall in oil prices.

While the world is in a heightened state of anxiety, lower rates have the potential to encourage risk-taking, refinances for real estate and businesses, as well as a renewal in purchases of big-ticket items like homes, autos, and machinery. The real estate market was frozen when conforming loans touched nearly 8% late last month, as lenders feared the 10-year would quickly run well above 5%. That risk has been significantly reduced by this week’s action in the bond market, and we are happy to report this positive development.

Market Commentary 10/20/2023

Posted on by Damon Germanides

10-Year Hits 16-Year High as Fed Extends Higher Rates Push  

In these uncertain times, geopolitical risks rightly dominate headlines. However, the expected “flight to quality” trade, where U.S. interest rates typically decrease as investors seek the safety of government-guaranteed bonds during conflicts, has been notably absent. The primary reason appears to be that substantial government spending has overwhelmed the bond market, in addition to major foreign holders of U.S. debt becoming sellers. Currently, the private sector, including businesses, individuals, and funds, has stepped in to fill this gap. Still, without foreign support, it is likely that bond yields will not fall by much if at all. 

Despite the recent poor performance of the equity market, overall economic data remains relatively strong. Retail spending data released earlier this week indicates that consumers are still spending, albeit more cautiously. Additionally, initial jobless claims came in lower than expected, which underscores an increasingly tight labor market. Even so, it is unlikely that the Fed will raise short-term interest rates at their next meeting, even though the data suggests otherwise. This is because the longer end of the yield curve is rising, with 10-year Treasuries grazing 5% before finally settling at 4.91% on Friday morning. The 10-year Treasury note rate serves as the benchmark for pricing all forms of personal, real estate, and business debt. The rapid increase in yields on this instrument is adding pressure to all types of borrowers, so the Fed may allow the market to contribute to slowing down the economy. 

Loans, Rates, and Real Estate

Real estate, which is highly sensitive to interest rates, continues to face challenges. It is difficult to gauge precisely how higher rates have affected prices due to sluggish sales. However, builder sentiment is declining, and new home sales show signs of following suit, despite incentives offered by home builders such as buy-downs and free upgrades. The commercial lending markets are under significant pressure, as a 5% 10-year Treasury rate is expected to push cap rate floors to 6% or even higher. Private debt funds providing bridge loans remain active, while traditional banks are cautious on most deals. With many billions of dollars in loan resets scheduled for 2024, the commercial lending market is shaping up to be remarkably interesting. 

We have said it before and will reiterate that in today’s market, independent mortgage brokers with a wide range of lending options are providing value to potential borrowers. The significant disparity in rates from one bank to another often reflects the bank’s perception of the economy, the housing market, or the local area, rather than market conditions alone. Large banks are keeping their margins healthy, except for their high-net-worth clients. Brokers are once again making a meaningful difference.