We are certainly in unusual times. One of the great joys of my job is speaking to people on a daily basis who are much smarter than me. While I understand why the housing market and equities markets have soared during the worst economic period since the Great Depression, it is not at all what I would have thought would have happened. Some great minds also remain perplexed by these events but chalk it up to massive synchronized central bank stimulus, artificially low rates, and transfer payments which have kept consumers spending. What scares the “smart money” is what could derail this momentum, and the most common answer is inflation. 

When and if inflation pops the bubble is anyone’s guess, but with another $1.9 trillion stimulus package promised by President-elect Biden, we are reaching debt levels that are a bit scary. We understand why this needs to be done so we are not arguing against more stimulus, but we are worried about the repercussions long-term of all of this money printing.

With that thought in mind, our focus at Insignia Mortgage is how does all of this affect the mortgage market. Our feeling is that interest rates have seen the lows and that rates will gradually rise. The Fed is encouraging inflation while also telling us that they will control interest rates if rates move up too far. This relationship will work for some time, but should the combination of vaccine (we should have 4 vaccines by end of March) and herd immunity get our economy fully re-opened, I see no reason why interest rate benchmarks such as the 10-year Treasury note will remain at 1%. The one outlier is if the virus mutates and current vaccines become ineffective (to date the U.K mutation is not worrisome but the South African mutation is creating some concern), all bets are off. We hope for all of us that this scenario does not pay out. 

Regarding individual loan transactions, we are biased toward locking-in rates which are at historical lows. The need for business has kept lenders working off of tight net interest margins which has helped affordability greatly as house prices have gone up fairly dramatically in some areas. Even if interest rates drop, many lenders have placed floors on the rates. Overall, our lending sources remain committed to making deals work and are doing all they can to help our clients during these tough times.

The December jobs report reflected an economic slow-down, which was no surprise given the spike in the virus around the country and the shelter-in-place orders that have displaced many small businesses. The slowing jobs picture also supports more stimulus and with a democratically-controlled government, there is no doubt the printing presses will be ramping up.  

The combination of massive stimulus and very low interest rates has created asset inflation (think stock market and home prices). A rise in asset values has been a great benefit to the economy and has had positive effects on spending and sentiment during these most challenging times. However, while asset inflation has boosted 401ks and home values, wage and price inflation are becoming more of a concern as inflation expectations are rising and could create tensions in the financial markets. We think this is not of immediate worry, but massive money printing does have repercussions, and if inflation runs hot, it could disrupt the equity markets and real estate markets. 

The 10-year Treasury breached 1% and touched the highest levels since last March. Rising rates hurt affordability for home buyers and also make riskier assets less attractive. Don’t get us wrong – as 1% 10-year Treasury is still very attractive; it still does not discount how far bond rates have moved off their lows. Should inflation continue to trend up, rates could move up quickly and banks will be quick to reprice. We are recommending to our clients to move while interest rates remain ultra-attractive.

As we approach Christmas, rising hopes of a stimulus package continue to circulate. The fiscal stimulus which Fed Chair Powell alluded to in his post-Fed meeting statements will be key to carrying our economy through a tough winter and rising Covid cases. The hope is that the uptake of the newly approved vaccines and resulting herd immunity will speed a return to normalcy by June 2021. The Fed has all but guaranteed zero interest rates through at least 2022. All of this is being done to keep our economy going. We applaud the swiftness of government action during this major crisis after having experienced the 2008 housing crisis. Transfer payments from the government this time around have kept the consumer-based economy grinding through a very unusual time and have probably kept our economy from falling off a cliff. The Fed sees better days ahead with projected 2021 economic growth of 4.50% and unemployment falling to 5%.  

With the Fed holding interest rates at zero and a huge government debt load, there has been little consumer price inflation, but asset prices have soared. It was not expected that household savings would rise during this time. The combination of low rates, swift action by the Fed to backstop the financial markets, and the work-at-home trend has pushed forward housing demand, especially for single-family homes in more suburban areas. Housing plays a huge role in our economy in normal times, but during this pandemic, it has been a crucial provider of employment and consumption.  

Ultimately, our focus is on how Fed policy and economic activity affects interest rates. For the moment, the clear path of no rate hikes will keep interest rates low. Banks will compete for yield and we expect to see more lending options into 2021 as bank and non-bank lenders try to differentiate themselves from one another. This is a great time to be a broker who can match a borrower with the right fitting lender. Insignia Mortgage continues to focus on more opaque borrowers who require more attention and a deeper dive into their financials. Our lenders are eager to close deals and are offering no-limit cash-outs, bank statement only loan programs, interest-only, and loans to real estate investors and foreign nationals.    

Much to the delight of borrowers, unprecedented levels of quantitive easing by central banks have pushed yields to zero or below in response to the global pandemic. This has helped many larger businesses and qualified households to recapitalize their balance sheets and lower monthly debt service. Residential single-family homes have also been a great asset class to own or borrow against as prices across the country have risen. Retail, office, and hospitality assets in major cities have been less fortunate. With news today that the FDA has approved the Covid-19 vaccines, it will be interesting to see how these industries shake out. So many small business owners are on the brink of failure. Government stimulus will be needed to keep these businesses going until the vaccine makes its way through our society. 

However, with so much money sloshing around, the riskiest assets have soared partly due to the Robinhood investing class moving their favorite stocks higher, partly due to safer assets such as government-guaranteed bonds, high-quality corporate bonds, and CD’s offering paltry interest rates. Equities do feel expensive but nothing says that stocks can’t move higher. TINA (“There Is No Alternative”) comes to mind as investors, pension administrators, and hedge funds need to put money to work somewhere. A quote from Warren Buffet is apropos in today’s market, “Price is what you pay, value is what you get.”

No one thought housing would be as robust as it has been back in the dark days of March of 2020. A quick response by the Fed and Treasury (amongst other central banks) drove interest rates down and helped many potential home buyers needing more space or working remotely move off the sidelines and into new homes. Loan volume has been intense as banks and non-banks price aggressively try to win business. Our local community banks and credit unions, which are where Insignia Mortgage places our more complex loans, have worked hand in hand with our borrowers to facilitate successful transactions. Our lenders are offering attractive rates and terms for our self-employed borrowers, real estate investors, and foreign nationals. Interest-only and cashout loans are readily available.    

A lackluster November jobs report sent both equities and bond yields higher. Why? With the economy losing steam due to a surge in Covid-19 cases, the markets are betting on more stimulus. Of particular concern is the Labor Force Participation Rate (LFPR), which dropped precipitously as people stopped looking for work. Therefore, the unemployment rate which clocked in at 6.7% is a bit misleading as more people give up looking for work. There is a growing concern for small business owners, especially those in retail, beauty, hotel, and hospitality in some areas which have been forced to shut their doors as Covid cases spike. The hope remains that Congress can work together to provide a lifeline to those hard-working business owners until vaccinations can be delivered.  

With still so much that can go wrong, why is the 10-year Treasury bond yields near 1% inflation? Unprecedented monetary and fiscal stimuli are starting to make some of our brightest financial experts worry about inflation. There are some signs that inflation is on the way. Wage inflation is moving higher. Groceries are more expensive. Housing prices have risen. These are all inflationary indicators. Whether or not inflation really breaks out is anyone’s guess. However, with interest rates still at historical lows, we are encouraging our clients to take advantage of the current rate environment as the odds of lower interest rates seems unlikely. Even if there is a major setback, there are no guarantee interest rates will move lower on bad economic or pandemic-related news. Central banks all over the world have printed money at unprecedented levels and by doing so have created tremendous levels of national debt. A small change in sentiment about the U.S. debt levels would lead to a move higher in interest rates quickly. Therefore, there is no time like the present to take advantage of lowering debt repayments by refinancing or locking in an ultra-low rate on a new home purchase. 

The Dow hit 30,000 – Wow! Downside volatility continues to seep out of the market in response to ongoing positive vaccine news, cooling political concerns over a peaceful transfer of power, and strong consumer spending. Disruptive technology stocks also have been on a tear, however with nose bleed valuations. The meteoritic rise in U.S. equities should be taken with a grain of salt as the combination of QE forever, and zero interest rates have made equities the only game in town for the moment. Housing has benefited from this surge in the stock market as prospective buyers of homes have seen their 401ks and other accounts increase in value. People buy goods and services when they feel flush. 

Let us not forget the economy was humming along prior to this pandemic induced shutdown. The pandemic to date has seen some businesses do much better or think about how their operations could be streamlined (think work from home, less physical office space, new collaborative technologies), while customer-facing businesses have been hit hard. Our lowest-paid employees have seen the biggest loss. Thus, we have the need to provide transfer payments to these employees who want to work but are being told that they are not allowed.  

Not too much to say about interest rates, as they very appealing and many borrowers who can qualify for loans are taking advantage of historically low-interest rates.  Low-interest rates have fueled a major but unexpected surge in housing. However, there are signs that the market may be cooling off, especially in high-end markets. With such low housing inventory available in desirable markets, there also appears to be a floor under housing price action. 

Insigna’s suite of lenders has a deep understanding of borrowers who are either self-employed, wealthy foreign buyers, or real estate investors, and they continue to make common-sense lending decisions on transactions.  This is encouraging news given how difficult the lending market was back in March and April of this year.

Covid case counts and looming shutdowns continue to drag down the markets. Thankfully, positive vaccine news from Pfizer and Moderna has limited downside volatility. Interest rates continue to trade in a tight range. The Fed has made it clear that interest rates will remain low for the near future to combat the pandemic and to help grease the markets. Some might say in the face of so much uncertainty that the markets are fairly complacent. For example, take a peek at the VIX index, which measures expected near-term volatility. It’s trading in the low 20’s, indicating that for the moment, there’s little risk of a market blow-up. All of that could change in the blink of an eye. We hope the VIX is right and that it’s forecasting better days ahead.

Home sales, both new and existing, remain on a tear. Who would have thought that a pandemic would drive home sales to levels not seen since 2005? Surging sales have been catalyzed by low interest rates, a demand for larger living spaces, and the growth of working from home for many professionals, freeing them up to move further from urban centers. With limited inventory, prices should remain intact even if the pandemic lingers for longer than anticipated. 

Fiscal stimulus is needed to bridge the gap to recovery. With businesses being shut down by the government again, there is only so much pain that they can endure before throwing in the towel. We hope Congress can work this out before the end of the year.  

Insignia’s suite of lenders continues to actively lend and make common-sense decisions. All types of loans remain available, including interest-only loans, loans with co-signors, investment property cash-out refinances, and jumbo loans for foreign nationals. Construction lending has rebounded, as well as bank bridge loans and an assortment of loan types for commercial properties.