Tag: market trends

Market Commentary 9/22/2023

Posted on by Damon Germanides

A Quick Comment on the Fed, Bonds & Housing

The FED

The bond market, which had initially resisted the idea of a prolonged period of higher interest rates, has embraced the idea that inflation is likely to remain elevated. We have consistently stressed that transitioning from a 3% to a 2% inflation rate would be fraught with challenges. As inflation accelerates, bond investors are increasingly seeking higher yields to compensate for this risk. Additional factors exacerbating the inflation issue include surging oil prices, large unions demanding substantial wage increases, a staggering $33 trillion deficit, and a Federal Reserve engaged in selling (QT) rather than buying bonds, among other pressing concerns. Unfortunately, none of these factors bode well for lower interest rates. The Fed’s recent communication, particularly the dot plot, has pushed expectations of rate cuts further into the future. This is because the economy continues to perform better than anticipated, and some indication that inflation may have plateaued at a level that remains unacceptably high for most Americans. While the likelihood of a soft landing is slim, we recognize that anything is possible in these complex economic times.

Bonds

Shifting our focus to bonds, it’s intriguing to consider why many on Wall Street seemed caught off guard by the prevailing interest rate environment. Although we acknowledge our own past misjudgments, we have consistently argued that there is a high risk of shifting toward a higher interest rate environment. Assuming inflation stabilizes at 3%, and incorporating a term premium of 1.5% to 2%, longer-dated bonds should hover around 4.50% to 5%. This appears to be the new normal, and individuals and businesses alike should base their investment and lending decisions on these assumptions. The far-reaching impacts of rising interest rates are just beginning to permeate the system. We can attest to this firsthand as prospective borrowers grapple with refinancing challenges and encounter difficulties in qualifying for new purchases.

Housing

While housing affordability remains a significant issue for many, home prices continue to remain high and are even rising in certain markets. In hindsight, the reason for this becomes apparent: nearly 15 years of ultra-low interest rate policies have left the majority of U.S. homeowners locked into mortgages below 5%. This has discouraged potential sellers from listing their homes, while higher rates have deterred would-be buyers. In an unusual twist, the forces of supply and demand are to some extent canceling each other out. This dynamic has helped sustain property values in the non-ultra-luxury segment of the market. 

Still, there are signs of potential trouble ahead as home builders are starting to offer major incentives such as 2-1 buy downs on mortgages as well as lower prices, in an effort to stimulate volume. Additionally, pressure increases on the commercial and multi-family segments of the market as loans begin to adjust. In some cases, current values considerably decreased compared to just a few years ago.

Market Commentary 9/8/2023

Posted on by Damon Germanides

Has Inflation Peaked? Bond Market Yields Suggest Uncertainty… 

Where Does Inflation Go from Here? 

A peak in service inflation may be on the horizon. A noteworthy example is Walmart, one of the nation’s largest employers, which recently announced that new hires will be earning less. This adjustment signifies a potential slowdown in wage inflation, which had surged to unsustainable levels due to the pandemic, supply chain bottlenecks, and substantial government stimulus. Initially encouraged by the Fed, this wave of inflation is unlike anything witnessed in the past 40 years and was largely due to the assumption that inflation would be transitory. 

While we are witnessing some moderation in inflation concerning goods (though still too high by our standards), service inflation remains persistently elevated. This is placing significant strain on businesses of all sizes, as consumers are becoming less tolerant of higher-priced goods and services. This is why the Fed is not rushing to lower interest rates.  

The situation becomes increasingly complex when we consider why interest rates remain high despite indications that inflation might be cooling off. Two key factors come into play. Firstly, the price of oil, hovering around $90 per barrel, is preventing a more significant drop in inflation. Although the Consumer Price Index (CPI) has declined from over 9% to roughly 3.2%, moving from 3.2% to 2% will be a lengthy process for the Fed. Secondly, the massive budget deficits of many developed nations are no longer being disregarded by bond traders (this includes the United States). Our government’s debt burden has led bond buyers to demand higher yields to compensate for the perceived risks associated with holding such bonds. 

Lastly, it is important to recognize that interest rate cycles are lengthy, whether on the ascent or descent. We are currently on an upward trend. Unless significant adverse events occur, this trajectory is likely to persist.  Assuming a 3% long-term inflation rate, it is not inconceivable that longer-dated bonds trade between 4% -5%.   

In the Next Two Weeks… 

Keep a close watch on next week’s inflation readings and the subsequent week’s Federal Open Market Committee meeting. In the current climate, everything revolves around inflation and interest rates. Additionally, pay attention to the 10-year Treasury bond, which is teetering at the 4.25% mark. If it breaches 4.35%, the markets could face a challenging remainder of the year. 

Market Commentary 9/1/2023 

Posted on by Damon Germanides

Bonds Can’t Catch A Break Amidst Unemployment Rate Increase 

The July Jobs Report brought encouraging signals for both the bond market and the Fed. However, the workforce saw an influx of more workers than could be absorbed, resulting in the unemployment rate rising from 3.50% to 3.80%. While wages are still growing, they are beginning to moderate and show signs of trending lower. This shift might provide the Fed with justification to hold off raising rates at its next meeting. Although the futures market indicates around a 40% chance of a November rate hike, we anticipate that this might mark the last rate increase of the cycle (if it does occur). On the other hand, mortgage bonds and Treasury yields oddly increased, potentially influenced by a weakening dollar and surging oil prices. 

Nonetheless, it’s important to avoid drawing broad conclusions from a single report. Commodity price inflation and service inflation remain high, and the Fed would likely want to see more substantial declines in these numbers. Conversations with local business owners reveal that input costs are eroding profits. Passing these increases on to customers is becoming increasingly challenging. The persistent difficulty business owners have in finding staff is keeping wages elevated. Notably, a major national retailer catering to lower to middle-income consumers, Dollar General, has reported that its customers are feeling financial pressure and adjusting their purchasing habits. This demographic has been hit hardest by elevated prices and could be a significant concern for the Fed. This context supports our belief that even if the Fed stops raising rates, a downward shift in interest rates might be a prolonged journey. Fed Funds rates could remain potentially elevated well into 2024 or even 2025. 

Loan Success Takes Grit 

Navigating the mortgage landscape is no longer a straightforward endeavor. While we maintain access to excellent products and lenders and are successfully closing loans, the path can be turbulent. Underwriting guidelines at banks are tightening, debt funds and mortgage banks are grappling with an illiquid secondary market, and limited housing supply in major cities complicates loan qualification. Financing costs have surged while housing prices have remained stagnant, particularly affecting higher-end home purchases. In this landscape, experienced mortgage brokers are proving invaluable by sourcing better-priced loan options, exploring more nuanced alternatives like interest-only or investment property loans, and connecting with smaller banks that embrace innovative thinking. Our broker team at Insignia Mortgage, for instance, achieved over $40 million in closings in July, while our fix-and-flip and bridge lending arm, Insignia Capital Corp, closed over $12 million in business. It was far from effortless. What matters most is that all our clients successfully completed their crucial transactions. 

Podcast “MPA Talk” Features Damon Germanides

Posted on by Admin

MPA Talk, the podcast for U.S. mortgage professionals by MPA Magazine, featured Insignia co-founder, Damon Germanides, in their latest episode entitled “Serving Up Solutions.” In this episode, host Simon Meadows interviewed Germanides for his perspective as a broker who specializes in complex loans, particularly for those who are self-employed. They discuss how he cut his teeth in the last big financial crisis of 2008, before co-founding Insignia Mortgage in Beverly Hills, California, in 2010. Beginning slowly, the company established relationships with smaller banks and credit unions, to build the business to where it is today. The son of a restaurant owner, Germanides likens the mortgage industry to the restaurant industry in terms of the tough challenges it presents – it’s been his driving force to succeed.

“My dad owned a restaurant for 43 years, an, that business is such an tough business that I used to look at the mortgage business and say, ‘as tough as it is today, man, the restaurant business is, is even tougher’. I’ve picked tough businesses because both of them have their challenges. That was a driving force early in my career, knowing how hard another business was, made me pretty tenacious.

When 2008, 2009 hit, my good analytical skills really started to shine because the business had moved away from the limited information type loans or the no doc loans or whatever. You had to have a complete understanding of the borrower’s financials, which required mortgage professionals to start to learn to read tax returns, understand cash flow, you know, do a sensitivity analysis on revenue and income, understand everything on the borrower’s financials and that, that really fit well with my skillsets.”

Damon Germanides, on why his key skills made him a good fit for the mortgage industry.

Listen to the full episode below, or via your podcast streaming platform of choice.

MPA Talk, July 21, 2023, featuring Damon Germanides, a broker who specializes in complex loans, particularly for those who are self-employed.

Get The Most From Insignia Mortgage

If you haven’t already, subscribe to Insignia Mortgage’s weekly market commentary and receive Damon’s unique insights on the mortgage industry via email.

Market Commentary 6/23/2023

Posted on by Damon Germanides

Rates Fall As Economy Shows Signs Of Slowing

I wanted to share an observation with you regarding the recent rate hike journey initiated by the Federal Reserve. Over the past few weeks, Insignia Mortgage has witnessed a significant upsurge in inquiries for cash-out refinances, bridge loans, and second mortgages. Borrowers are seeking these solutions to address higher interest-rate debt or growing financial obligations. We attribute this rise in inquiries to borrowers experiencing loan adjustments from increased interest carry, coupled with the Fed’s hints of higher rates for a longer duration.

Bank underwriting remains stringent for best rate execution, as evident from the latest senior loan officer survey. The impact of these tightening lending conditions on the residential and commercial real estate markets is yet to fully unfold. So far, the housing sector has shown resilience, while the commercial office market faces more challenges. Looking ahead, we anticipate an intriguing landscape in 2023 and the first half of 2024. Higher interest rates will likely necessitate price adjustments to accommodate the increased cost of capital for leveraged property acquisitions.

The Lending Pool Outlook

While some lenders strive to keep interest rates at 6.000% or below, we acknowledge that the pool of lenders offering moderate rates and flexible underwriting continues to shrink. However, at Insignia Mortgage, we remain committed to diligently exploring the market and identifying lenders capable of closing transactions efficiently. We are seeing a big uptick in the non-QM space as borrowers struggle to qualify for a loan. These non-QM programs are helping as they are less strictly underwritten, but carry a higher rate for the commiserate risk.

Market Commentary 6/16/2023

Posted on by Damon Germanides

The Fed Delivers A Hawkish Pause

The Federal Reserve’s dot plot strongly suggests that interest rates will continue to rise in increments of 0.25 basis points, with potential hikes in both July and September. This trajectory would bring the Fed Funds terminal rate to 5.75%. However, accurately predicting the impact of further rate hikes on the economy is a difficult task. There are valid arguments both for raising interest rates and for taking a pause.

Despite some concerning economic data, the US equity market has recently experienced significant growth. Even a hawkish Fed has had little influence on cooling off this recent rally. In the face of such data, this rally creates a wealth effect and eases financial conditions. Such does not align with the Fed’s intentions. Additionally, the US consumer remains strong, evidenced by better-than-expected retail sales. The housing sector, particularly in more affordable segments, has seen a surge. Multiple offers are becoming common in spite of mortgage rates hovering around 6.00%, with rates having doubled compared to over a year ago.

The State Of The Economy

Regardless of these small successes, several manufacturing reports indicate a weakening economy. The yield curve has steepened again and weekly jobless claims have risen, all of which support the argument for a pause by the Fed. It’s worth noting that labor is a significant cost for most businesses. With a tight labor market, wages have moderated yet continue to rise. The Fed considers wage inflation and a tight labor market as factors that justify ongoing rate hikes.

The current expensive stock market, fueled by AI mania and investors trying to catch up after anticipating a market downturn, may have a positive effect on residential real estate. Investors recouping losses or utilizing gains to purchase homes can contribute to this result. Nonetheless, mortgage underwriting remains challenging. Banks are not giving money away despite higher interest rates. Our office diligently surveys over 20 lenders daily to find the best execution for prospective borrowers. With almost 20 years of experience in the industry, we can confidently say that these are some of the most challenging times. The main cause of these current challenges is the combination of a tight housing supply, the limited amount of new construction in our primary market, and the overall high cost of coastal housing markets. 

Market Commentary 5/26/2023

Posted on by Damon Germanides

Mortgage Rates Rise As Economy Proves Resilient Amidst AI Mania

The recent surge in AI-focused technology companies has been caused by pure momentum. The soaring movement in these stocks raises concerns about a potential bubble. While AI is an exciting technology and its impact on businesses will undoubtedly be transformative, the current buying frenzy may lead to adverse outcomes for overvalued tech stocks. The combination of AI mania and the overall equity market rise may also give the Federal Reserve justification to raise short-term interest rates, once again. The betting market currently predicts a 60% chance of a rate hike in June. Despite tightened lending standards, the equity market exhibits resilience. Alongside an increase in PCE inflation data, the Fed will likely continue addressing inflation concerns. Given the persistent nature of inflation, a rate hike in June seems more probable than not, although we hope to be proven wrong.

The dichotomy between luxury and essential home purchases continues to define the housing market. Clients seeking homes under $3 million face multiple offers and even bidding wars for properties priced to sell. The hardiness of consumers and the overall economy is impressive. Nonetheless, the increasing demand for affordable housing, up to the upper-middle-class segment (homes under $2 million), necessitates attention. It is concerning to witness bidding wars in certain pockets of the market amidst economic uncertainty and epoch-making interest rates. Consequently, several homebuilder stocks are also reaching historical highs.

A Pivot In Purchasing Priorities 

Inflation remains a persistent issue. Retailers like Costco have indicated that consumers are making more selective choices when purchasing bigger or more expensive goods. This is one sign that the average American is being negatively affected by inflation. Be that as it may, consumers are still willing to spend on experiences and travel to compensate for a prolonged lockdown. They instead reduce their purchase of items like televisions and washing machines. On the higher end, Restoration Hardware reported poor sales as customers pull back.

Mortgage rates have quietly and significantly increased, with some conforming rates exceeding 7.00%. While the AI hype dominates headlines, Treasury yields have made an equally notable move, but unfortunately not in favor of borrowers. The 2-year Treasury yield has risen over 25 basis points this week, closing at 4.56%. This substantial increase suggests that the bond market anticipates further action from the Fed. In early May, the 2-year Treasury was trading around 3.72%. This drastic shift in yields and the resulting implications deserve close attention. Additionally, the 2-10 Treasury spread has re-inverted to -76, an indicator often associated with recessions. The inversion of the yield curve should be monitored closely.

Currently, equities are driving the market, obscuring concerns about a potential debt ceiling standoff, overpriced tech stocks, or higher interest rates. It is a fascinating yet challenging time to analyze these market dynamics.

Market Commentary 5/19/2023

Posted on by Damon Germanides

A Tale of Two Housing Markets As Rates Rise 

Even with the rise in interest rates, the limited supply of existing homes for sale is leading to multiple offers on the more affordable properties entering the market. This growth in demand is a key factor behind the surge in builder stocks reaching near all-time highs. New home construction is crucial as many homeowners are hesitant to sell their homes. This situation also highlights the importance of recognizing that real estate markets cannot be generalized. The ultra-high-end existing and new home market, particularly homes priced over $10 million, is not experiencing the same level of activity due to higher interest rates and concerns about the economy. 

Despite potential negative news such as debt ceiling talks and rising interest rates, the stock market remains unfazed, largely driven by the future of AI. A deeper inspection reveals a crowded trade, with eight stocks, including Microsoft, Google, and Meta, accounting for the majority of gains this year. Excluding these eight stocks, the market performance is relatively flat or slightly positive. 

The Federal Reserve remains vigilant as the June possibility of another 0.25 basis point interest rate hike starts to gain traction, although it remains uncertain. It is worth reiterating that inflation is a challenging problem to tackle. While goods and housing inflation are easing, the unemployment rate below 4% continues to exert pressure on wages and services, making a swift return to 2% inflation unlikely. Additionally, inflation remains persistent in most developed countries, with even Japan defying expectations by recording inflation well above 3%. 

The Mortgage Maze 

Quietly, interest rates have climbed back above 3.500% on the 10-year Treasury note. The future of rates will depend on how Congress addresses the debt ceiling and the potential for further flare-ups with regional banks. One thing is certain: obtaining financing for residential and commercial properties is becoming more challenging, requiring more expertise to navigate complex loan scenarios. Moreover, there is a significant divergence in rates among lenders, as illustrated by the discrepancy of 0.5% in the loan scenario priced today, emphasizing the value of a knowledgeable broker. 

In this dynamic market environment, we remain committed to providing our clients with expert guidance and solutions to successfully navigate the ever-evolving lending landscape. 

Market Commentary 5/12/2023

Posted on by Admin

Inflation and Slowing Economy Weighs Heavy on Consumer Confidence

The results of Friday’s University of Michigan Consumer Sentiment Report (UMCSENT) were lower than expected, emphasizing the impact of inflation and a slowing economy on consumer confidence. UMCSENT holds significance as it provides insight into the current sentiment of consumers, and the reading was not favorable. As we have previously mentioned, we believe that tackling inflation is always challenging. Although we anticipate short-term interest rates are approaching their peak, interest rates are not likely to decline as rapidly as some may hope. The Federal Reserve made a critical mistake by allowing inflation to exceed 9%. As a result, they will have to exercise caution in reducing interest rates until there is clear evidence that inflation has been effectively addressed.

In terms of the Consumer Price Index (CPI), overall inflation is showing signs of abatement. Regardless, super-core inflation ( which the Fed closely monitors) remains elevated. The Fed is prepared to accept a rise in unemployment and sustain potential market repercussions to bring down inflation. This strategy hinges on the recognition that inflation disproportionately affects the most vulnerable individuals. Additionally, it is important to consider that other factors continue to exert pressure on the prices of goods and services; like the post-Covid uncertainties in global supply chains and the absence of cheap labor from China. 

Housing Supply, Consumer Sentiment, and Lending Sources

The surge in interest rates has prompted a decline in existing home sales. Borrowers looking to upsize or downsize their homes are hesitant to give up their mortgage rates of around 3% in exchange for new rates of 5% to 6% or higher. This trend has contributed to the rise in stock prices of new home builders. The housing market remains constrained, particularly in larger cities, due to limited supply.

There are concerns surrounding regional banks as deposits flee and smaller banks face  balance sheet challenges. Stronger banks are positioned to acquire weaker ones. While these mini-regional bank crises are not systemic, they are creating a tighter lending environment. Many of these banks were involved in services like commercial office space as well as provided financing options for non-institutional sponsors, construction, and other specialized loans that larger money center banks often refused. We expect to witness further episodes of bank-related issues in the coming months.

At Insignia Mortgage, we are navigating this environment proactively. Our team of professional loan brokers has identified several interesting lending options, including credit unions, boutique banks, and larger private banks that offer excellent terms for the right clients. Here are some highlights:

  • Loans up to $4MM with loan-to-values up to 80%
  • Interest-only products available for high net worth borrowers up to $20 million
  • Bank statement loan programs up to $7.5MM with rates in the low 7s
  • Financing options with as low as 5% down payment for loans up to $1.5MM and 10% down payment for loans up to $2MM
  • Foreign national loans ranging from $2MM to $30MM

We remain committed to finding innovative solutions and serving our clients with exceptional lending opportunities amidst this challenging market landscape.

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.