Tag: mortgage rates

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 4/21/2023

Posted on by Damon Germanides

Mortgage Rates Hold Steady

Markets were calm this week as initial worries over bank earnings and balance sheets were better than anticipated. Bank of America’s CEO, Brian Moynihan, provided comfort to the market with his commentary on the consumer, the state of the banks, and his explanation of why money is moving out of the banking system to higher-yielding and safe instruments such as Treasuries. In short, the outflow of money from banks is what the Fed wants to see. In our highly leveraged economy, money flowing from the banking system will tighten the amount of available credit and require banks to offer more yield to keep depositors. This keeps interest rates on mortgages elevated. As a result, there is less money in the economy, which should slow demand and help cool off inflation. It sounds simple, but the twist comes with timing. Fed policy works with long and variable lags, so any policy initiated many months ago may only now be impacting the economy. That is why many are calling for a pause to rate hikes to see what may come from the jumbo move in short-term rates over the last year. However, betting markets believe the Fed will raise rates another .25 basis points in May as Fed officials continue to advocate for further tightening in its inflation fight. With service inflation remaining sticky and business activity picking up, we too believe the Fed will go for one more hike.

Nevertheless, there are many mixed signals that suggest the economy is cooling. Auto sales and housing have certainly slowed (yet builder stocks are near all-time highs, go figure). While loan defaults across commercial, auto, and consumer credit remain low, default rates are rising, as are spreads. The MOVE index, a measure of bond volatility, is very high, which is never a good sign. Weekly jobless claims point to more layoffs ahead. Let’s not lose sight that a strong sign of a looming recession remains with the inverted yield curve. In addition, banks are limiting the lending box in anticipation of a slowing economy, lack of deposit growth, and in response to the SVB and Signature Bank failures.

Smaller Lenders Are Better

As big banks tighten the lending box on residential mortgages, Insignia Mortgage is locating eager to lend sources like smaller banks and credit unions.  We recently partnered with a local, federally-insured institution, with an old-fashioned way of doing business. This lender looks at each scenario case by case and then makes a decision. Interest rates are in the low 5’s for a 5/1 ARM, and this particular lender will offer a loan amount of up to $4 million dollars at 80% of appraised value. No banking relationship is required. We like these lenders because they are community-oriented and far easier to deal with than the bigger banks. Their interests are aligned with ours and most especially, our clients. Every deal matters to these smaller lenders fighting for market share against the bigger banks.

Market Commentary 1/20/23

Posted on by Damon Germanides

Job Loss & Poor Housing Data Drive Mortgage Rates Lower

It is becoming increasingly difficult to argue that the economy is not slowing. Several major public companies, including Microsoft and Google, have announced layoffs. Now, most economists ally with the recession camp. Retail sales were very poor, existing housing sales are at a 13-year-low, the yield curve is extremely inverted, and long bonds are falling. Nonetheless, the Fed is resolute in raising short-term interest rates to eliminate inflation. Why, with so much negative sentiment, is the Fed dead set on doing this?  The answer lies in what the Fed is seeing in the job market and persistent wage growth. A survey of regional Fed data supports the notion that although wages are moderating, many parts of the job market remain tight and wage pressure has yet to soften. As wages constitute a large chunk of any company’s expenses, higher wages lead to higher prices, assuming the business can pass along those prices. 

Looking at the history of the economy, the Fed has at times, been truly unsuccessful in pushing down inflation. For example, the grim inflation episodes of the late 1970s and early 1980s led to several rate increases and declines. As a result, the Fed had to resort to very high short-term interest rates to finally quell inflation. We suspect that the Fed Chairman does not want to be remembered for failing to get the job done on inflation. He would rather see equity and real estate prices come down than risk a re-acceleration of inflation.

Even with the Fed’s rate hikes, and jaw-boning the markets constantly, financial conditions have eased since late last year. The 10-year Treasury is south of 3.500%, mortgage rates have dipped, and global equities have rallied. This is not what the Fed wants. Therefore, the Fed will be raising short-term rates yet again in early February. Odds are for a .25 bp increase, but don’t count out another .50 bp as their terminal rate target is above 5.00% (Fed Funds are currently at 4.25% -4.50%)

Distress in commercial real estate is starting to make it closer to the front page. There are about $175 billion in troubled loans globally, many of which are coming due later in 2023 and 2024 with the focus being on the office. Some residential areas like Austin and Boise experienced massive price appreciation during the pandemic and are now seeing prices come down. However, strong coastal market prices are holding steady. This is due to the combination of both a robust and diversified economy with low levels of inventory serving as a floor to steep declines. Mortgage rates have drifted lower. Lenders are now thinking about 2023 production goals on how to make loan requests work, especially on the portfolio bank side of the business. This is a welcome development and will certainly help the local real estate market.

Market Commentary 9/9/2022

Posted on by Damon Germanides

Equity Markets Move Higher, Encouraging Soft Landing For The Economy

U.S. equity markets proved resilient against the backdrop of a Hawkish Federal Reserve. Several voting members of the Fed spoke this week and the message was clear: short-term interest rates are going higher to combat inflation. The Fed wants input inflation to go down (think wages and energy) as well as consumption (think feeling poorer due to home value or retirement accounts being down).  However, the equity markets didn’t get the memo and rallied into the weekend.

Markets can sometimes react in a way that may seem irrational initially, but over time proves correct. In my mind, the equity rally suggests inflation may be coming down and job destruction may be happening more quickly. The so-called soft landing for the economy will be the result of Fed tightening. My prediction is there is more pain ahead. Volatile markets both up and down will be the norm for the balance of the year. The Fed will err on the side of higher interest rates for longer, which will put continued pressure on bonds and all investable assets. Remember, it takes time for the Fed’s policies to work their way into the system. That is why caution in this type of environment is so important.  Don’t fight the Fed. 

75 bp seems to be the likely direction in short-term interest rates when the Fed meets later this month.  That number was forecasted to the Wall Street Journal to help mitigate any surprises. The cost of debt is rising quickly. Higher yields are becoming attractive for savers, which is one positive to this so-called “return to normal interest rate” journey central bankers are taking us on. Real estate prices are adjusting as expected in the face of higher interest-carrying costs. Buyer and seller negotiating is back in vogue and all offers are being looked at. 

One interesting phenomenon that’s presented itself has me particularly excited to share. This past week Insignia Mortgage has located three new lending sources which specialize in the following: (1) financing high-net-worth domestic or foreign borrowers, (2) a new regional bank that offers attractive interest-only jumbo loans, and (3) a new commercial bank that offers investment property loans up to 20 million dollars. As rates have increased, so has the appetite to lend for those banks that didn’t chase yield to near zero. While business remains challenging, all is not lost in this wonderful free market economy we get to live in.

Market Commentary 1/14/22

Posted on by Admin

Inflation Tops 40 Year High & Bond Yields Jump

Mortgage rates have risen quickly. As we stated in our previous commentaries, once longer-dated bond yields begin to ascend from historically low levels, the outcome is violent given how quickly interest rates on mortgages move up. This has to do with the way bonds are calculated and the lower level of early payoffs from refinancing transactions as rates rise. The equity markets have also been hurt by rising rates and 40-year high consumer inflation readings. The Fed has admitted inflation is a bigger than expected problem and that it’s time to wind down QE measures by March, as well as start raising short-term interest rates. Thirty-year mortgage rates are now selling well above 3.25%, a dramatic move in percentage terms compared to only a few weeks ago. As inflation outpaces jobs gains, the rise in the cost of goods and services makes our country more vulnerable. From hourly workers to the elderly on a fixed income, inflation is a hidden tax. The Fed is behind the curve due to their extraordinary money printing policies enacted in part with Congress due to COVID-19. Prices in equities and real estate will adjust, but with so much liquidity in the system, we wouldn’t expect major down drifts in value. 

Now, the good news. Inflation on the goods and service side is most likely not structural. Inflation readings should come down over the next 12-18 months. Also, interest rates are still very low. Should bond traders believe the economy is slowing, longer-dated interest rates may not go up that much further. Housing expense remains affordable due to low-interest rates even with housing prices at record highs. A cooling-off of high-risk trading (think crypto and meme stocks) may not be as bad as individuals reassess risk and reward. Finally, the economy remains strong with many millions of job openings. As the Omicron variant (which is more contagious but much less virulent) makes its way through our population, we may finally be able to put the pandemic in the rearview mirror. This should be good for spending and increasing overall economic productivity, as individuals come together again without concern of infection.

However, crosscurrents are everywhere. We are keeping a close eye on the Treasury yield curve, volatility indexes, and consumer confidence readings as signs for where we may go in the coming months. Follow the Fed has been good advice for a long time. We are actively contacting clients and encouraging them to apply for still very attractive loan terms, albeit off the all-time lows. Now is not the time to be complacent. 

09_17_2021_blog

Market Commentary 9/17/21

Posted on 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.  

05_21_2021_blog

Market Commentary 5/21/21

Posted on 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. 

05_14_2021_blog

Market Commentary 5/14/21

Posted on 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.

May-3-blog

Market Commentary 5/3/19

Posted on by Damon Germanides

A better than expected April jobs report is further evidence of the “Goldilocks scenario” that our economy continues to flourish in – albeit one that complexes many financial experts. With no near-term threat of inflation as well as improving data on productivity and manufacturing, the U.S. is experiencing the greatest recovery in many of our lifetimes.  Today’s job report supported the current administration’s belief that the combination of lowered taxes and less restrictive regulation would stimulate the entrepreneurial spirit of American business owners. It is hard to argue against this position at the moment.

There were 263,000 jobs created in April, well above estimates of 180,000 to 200,000. The unemployment rate fell to an almost 50-year low at 3.60% (WOW!).  With wage inflation coming in lower than expected, bonds reacted favorably to this report and stocks surged.

Setting aside the myriad of potential issues impacting the market, which include Brexit, the 2020 election, and China-US trade tension, the talk for the moment is the near-perfect market conditions of the U.S. is economy right now.  As a rising stock market is a strong vote of confidence for U.S. consumption, we are seeing an increase in home buying activity as well as other financing activity.  With rates still not too far off historical lows, it should be a good home buying season.         

With the 10-year Treasury range-bound, we are biased toward locking in rates given the positive economic reporting and comments from the Fed this week about their concerns that inflation may be transitory.

Apr-5-blog

Market Commentary 4/5/19

Posted on by Damon Germanides

The highly watched Monthly Jobs Report put to rest concerns about a slowing economy as the report beat estimates with 196,000 jobs created versus 177,000 expected.

This data should put to rest for now fears on a looming recession and thus help boost stocks and slightly lower bond yields. Unemployment remained at a multi-decade low of 3.80% and hourly earnings rose to 3.20% year over year from February (which is bond-friendly as wage inflation remains tame). The Labor Force Participation Rate (LFPR) remained unchanged at 63.20%.

In other good news,  the yield curve steepened. The potential flattening of the curve was a major concern just a few weeks ago, as that would be a sign of impending recession. However, a positive sloping yield curve is an indicator of a healthy outlook for the economy. Also, China and U.S. trade talks appear to be going well for the moment which has also helped stocks move higher. However, concerns remain as global economic growth has slowed in Europe, China, and Japan as central bankers continue to provide massive stimuli to their respective economies to spur growth. Finally, a Brexit deadline is looming in what is turning out to be a very complicated matter. So far, the markets have not been spooked by a no-deal Brexit, but that could change as the deadline approaches.

Here in the U.S., low rates have spurred home buying and refinances. We recommend taking advantage of the low interest environment because if the U.S. economy continues to surge, the Fed rate hike conversation will be back on the table. With this thought in mind, we remain biased toward locking-in interest rates at these very attractive levels, especially with the strong jobs report confirming no recession and the positive chatter regarding U.S. and China relations coming out of Washington.