The Treasury yield curve has steepened recently as various factors have pushed out longer-dated Treasuries (hopes of a vaccine, improving jobs data, and signs of inflation, e.g. copper prices). It’s not all bad news as higher rates suggest the economy may be improving and more stimulus may be on the way. The Fed has already been clear about letting inflation run above the 2% target. Should inflation and or interest rates move up too far expect the Fed to implement yield control measures to push longer-dated Treasury yields below 1%.
Housing has been on an absolute tear as both new and existing home sales constrain supply. Normally, you’d think a large ticket item such as buying a house during a global pandemic would be counterintuitive, but it appears that Covid-19 has nudged fence-sitters into action. Low-interest rates have definitely been helping this trend, with rates below 3%. Rates as low as 2% for high net worth borrowers are readily available. Big business has also benefited from the low rate environment, especially companies that can access the public debt markets. By lowering the cost of debt, companies will allocate debt service funds on innovation or share buybacks once Covid-19 is in the rearview mirror.
Insignia’s funding sources remain fairly optimistic as borrowers have been able to rebound from the gut-punch they took in March. Our lenders continue to work with our borrowers on loan approvals and fast closings for purchases. More opaque products such as interest-only loans, investment property loans, and loans for foreign nationals are also available. The rate for these products begins in the low 3% range and moves up from there.
The pandemic continues to present health and economic challenges across the globe, making the market a challenge to navigate. While the concerns are real, the U.S. economy continues to bounce back. Unemployment remains elevated but it has improved a great deal from the March lows. Positive reports this week on manufacturing, retail spending, and savings are all good news for the economy as we head into the holiday season. Homeownership remains on a tear, especially in the suburbs. It will be interesting to see how urban life is re-defined as working from home becomes the new normal, and whether this trend sticks post-Covid.
Rates will be low for some time. While it is hard to see rates go much lower, it’s possible that interest rates could dip even further. Covid-19 infections are on the rise in Europe and the U.S. and that could play a role. However, the odds seem in favor of a gradual rise in interest rates over time as we all adjust to the current environment.
Both the bond and equity markets are focused on whether Congress and the White House can agree on a much-needed additional stimulus package. Many businesses are suffering, as are all the employees in public-facing businesses such as restaurants, hotels, entertainment, and travel. Every day we hear of more companies laying off employees. The stimulus will help Americans get to the other side of the pandemic. On the other hand, the pandemic has propelled innovations in new ways to work, which may lead to more efficient business models going forward.
Housing remains on a tear as people exit big cities for less population-dense zones such as suburbs and more rural areas. Super-low interest rates have driven high demand and mortgage activity. However, the 10-year U.S. treasury bond has been rising, approaching .80%. Market trends are impossible to predict due to the many variables at play. The biggest unknown is the intensity and impact of Covid-19 surges this fall.
In the California luxury market, high-end inventory is scarce as the market remains very active, pushing prices upward. We continue to work with our lender-partners to help our clients take advantage of these incredibly low-interest rates on new mortgages and refinances.
The markets began Friday morning trading down as the president and the first lady tested positive for Covid-19 which reminded all of us how contagious this disease is. However, by mid-day, stocks recovered much of their losses as Congress confirmed additional stimulus for the economy in the face of a potential second wave of infection, presenting a challenge to economic recovery. The September jobs report was disappointing. The unemployment rate fell to 7.90% from 8.40%. Jobs may have recovered off of their April lows, but the stall is affected by a global economy that is not fully reopened. Many industries are still not operational, or if they are, at very reduced levels.
Housing remains one of the great positives during this pandemic as potential buyers flee the big cities for the suburbs. People who can afford to be a homeowner are going for it. Mortgage rates at all-time lows are serving as an economic stimulus since reduced payments leave more money in the pockets of homeowners, freeing up dollars for more discretionary spending.
Here at Insignia Mortgage, we continue to see unprecedented demand for residential, bridge, and commercial real estate financing. Fortunately, our suite of lenders has healthy balance sheets, are mostly local and portfolio lenders, and are working closely with our team to help our clients with their real estate financing needs.
Interest rates remain low and may go lower as volatility picks up in the equity market. Some of the reasons of this down market includes a very tense upcoming presidential election, a slowing recovery, high unemployment, and a global uptick in Covid-19 cases, just to name the biggest factors. These concerns should benefit bonds near-term. However, there are some positives as the economy has recovered from the March lows. There has been a spark of innovation due to the pandemic and business data indicates that durable goods sales have picked up. There are also some rumblings that Congress is working on additional stimulus relief packages.
The mortgage environment remains very busy as many borrowers are looking for new homes outside of city centers. Many are also seeking to refinance their existing mortgages at these all-time low-interest rates. Banks continue to underwrite applications vigorously while ensuring that the borrowers they qualify will be able to repay their mortgages. Banks share the concern that as COVID cases continue to spike upward, we may face more shutdowns, as the UK has recently enacted. Keep an eye on weekly unemployment claims, which just moved up, as a sign of where the economy is headed.
The August jobs report continued to show progress as non-farm payroll employment increased by 1.371 million as the unemployment rate fell to 8.40%. Prior to the COVID-19 outbreak, the unemployment rate was 3.50%. While the jobs picture has improved a great deal from the April high of 14.70%, we still have a long way to go. Also, these numbers don’t take into consideration white-collar workers who have taken pay cuts or whose bonus structure has been adjusted downwards. These high-income earners account for a lot more consumption so it will be interesting to see how consumption looks for the biggest buyers of goods and services in the coming months as the pandemic continues to limit economic activity. Also, the pace of employment gains appears to be slowing as the U.S. heads into the fall and winter months. How the virus reacts to cooler weather is weighing on all of us.
Treasury and mortgage bond yields traded higher on good, but not great, jobs data. What’s ironic about the move up in interest rates today is that the equity markets are experiencing the heaviest selling pressure since June which typically pushes bond yields lower. With Central Banks printing literally trillions of dollars in currency, the fear is that inflation will finally arrive as evidenced by the hint of upward-moving hourly earnings data which came in well above expectations. This fear seems to be of bigger concern than the recent market volatility. Also, the concentration in mega-tech stocks is where a lot of the carnage is being felt as momentum stocks give up gains, and valuation and fundamentals are being discussed as the reason to buy stocks. Only time will tell if the market is moving past momentum trading. The gains in the tech sector specifically have been positive for those investors who were invested in this sector and have helped increase net worth and consumer confidence.
In mortgage news, our local-based banks and credit unions continue to offer a wonderful combination of intelligent underwriting and very fair pricing. Purchase transactions are being reviewed quickly and the Southern California housing market is very healthy. Insignia Mortgage continues to offer unique products to help our wide swath of borrowers obtain financing.
U.S. equity markets continue to move higher this week. The Fed chair further supported the markets with recent comments on changes in the way the Fed will target inflation and full employment. The Fed is unwavering in keeping interest rates low for longer. For the moment, there is no fear of inflation. With millions of Americans still unemployed or under-employed, zero rate interest policies are designed to spur on the investments in riskier assets, help corporate and individual borrowers refinance to lower debt service, and inflate asset prices to boost consumer and business confidence. Inflation is no longer feared by the Fed and is actually being encouraged through their policies. The bigger and less talked about fear is the threat of deflation or even worse stagflation.
With the economic activity improving and our society adjusting to living with the pandemic, mortgage rates have been moving higher ever so gradually. There are still many land mines that could drive rates lower, such as the return of major outbreaks of Covid-19 in the fall, U.S.-China tensions, an unexpected drop in equities, and the U.S. Presidential and general elections. However, as improving consumer and business data continue to trickle in, the risk seems tilted toward higher interest rates. The Fed wants inflation and the old saying of “don’t fight the Fed” can loosely be applied to where mortgage rates might head in the coming months. We remain mindful of how quickly interest rates may move if the market is surprised by better than expected positive news. We are encouraging our borrowers to take this into consideration when looking for a new home or refinancing an existing one.
It has been difficult to reconcile the markets. Only a few big tech stocks account for much of the market gains as the pandemic has fast-forwarded digital innovation while also exposing poorly run or heavily debt-laden traditional businesses. Equity markets have risen along with unemployment. Zero percent interest rates on government bonds and high-quality corporate bonds have pushed investors further out of the risk curve as stocks with little earnings have been soaring. Zero-interest rates have also been a big boon for housing and more — specifically single-family homes. Home sales have been on a tear, as well as home improvement. Working from home is likely to continue well into 2021 and our homes have become the center of our universe. Will people modify their behavior as the pandemic subsides and life feels more “normal”? The tech sector seems to be betting that our collective behavior has changed for good. Personally, I am not so certain, but do like the idea of working from home a couple of days of the week and I don’t mind wearing a mask when I go to the grocery store or pharmacy.
With weekly unemployment rising, the economic recovery appears to be slowing. Government assistance is designed to help bridge the gap for the many businesses that remain closed or heavily impacted. In order to provide this assistance, the U.S. Treasury continues to offer unprecedented amounts of debt into the market place with no end in sight to finance these benefits. Should confidence wane on the U.S. ability so service this massive debt, rates could move higher, and markets could be disrupted. This is unlikely but something to consider. Also, should mortgage deferments and delinquencies pick up again in the fall, banks may be faced to raise interest rates as well.
On the positive side, we’ve seen manufacturing data come in better than expected, and virus stats are improving. There are so many different trajectories we could go from here. We all continue to grind week by week, and day by day as we live through the first major pandemic in over 100 years. On the mortgage front, we see no reason to not take advantage of historically low-interest rates. There is just not much juice left to squeeze on interest rates at these levels.
The U.S. Treasury and agency bond markets became more volatile as inflation data heated up and came in better than expected. Unemployment claims dropped below a million claims. Consumers continue to spend even though spending habits have shifted to e-commerce. These reports support the notion that some economic recovery is occurring as businesses and individuals adjust to the pandemic. However, economists and analysts are concerned about how far the economy can grow in the current environment. With major U.S. indexes near or above all-time highs, the dislocation between Wall Street and Main Street will need to be reconciled. Yet there are few alternatives for investors other than equities. Historically low government and corporate bond yields leave investors not a lot of options outside of taking on more risky asset classes.
The housing market remains busy, fueled by low-interest rates and the desire by many apartment and condo dwellers into single-family homes. The tight supply of single-family homes has also kept prices stable.
Affluent buyers have been taking on more second and third home purchases in a bid to own more tangible property.
All of this good news suggests rates may move higher. This week the FHFA added .50 bps hit to all refinances, impacting agency products. Mortgage refinances ticked up in response, leaving many people in the middle of a refinance in limbo, wondering if a refi is now worth it. Jumbo-portfolio lenders are less apt to price their products day-to-day and to date, they remain eager to grow their loan volumes. This is good news for our many self-employed borrowers and for those with complex loan scenarios.
The U.S. economy continued to make a comeback with 1.8 million new jobs created in July. Unemployment fell again to 10.20%, and the Labor Force Participation Rate rose to 61.40% from 60.20%. Just six months ago, we were writing about the lowest unemployment numbers of all time in the U.S. While this latest jobs report reflects a better-than-expected economic recovery from the March lows, many of the job gains in sectors such as travel, leisure, and restaurant staffing will most likely turn out to be transitory. Many U.S. businesses are operating at far below optimal levels and have probably laid people off again since the July print due to ongoing virus outbreaks across the country.
Many Americans, especially those in more public-facing jobs, may be back to work, but not at pre-COVID pay levels. These issues were probably behind the lukewarm response by Wall Street to the sizable job gains. The bond market remains skeptical as short-term and long-terms rates flattened further. Job creation from this point onward will rely on effective remedies as the economy will probably not be able to march higher under the shadow of fear of more shutdowns. Business and consumer spending will not normalize either. There is still a tremendous amount of uncertainty, but the scientific community is learning more about the virus daily and many potential treatments are just on the horizon.
While Wall Street grapples with forecasts, Main Street is concerned about paying the bills. More stimulus will be needed to bridge the millions of Americans who remain underemployed or out of work. This financial support is still being negotiated. Some clarity on the next round of relief should come in by next week, but not without the usual political bickering and finger-pointing. Should Congress not be able to come to an agreement, the markets could experience much greater volatility. For the moment, markets are assuming more stimulus is a near-certain outcome. However, even under a no-deal scenario, President Trump has stated that relief measures could be extended by executive order, giving Congress more time to come to terms with the Congressionally approved relief package. It is obvious that the Fed’s swift action and Congress’s willingness to open up the coffers helped to protect the country from diving into a deep depression. The trillions of dollars spent to date have been unprecedented and how we pay this back is a discussion for another day.
Both the luxury single-family market end and suburban housing market have been a great asset class to own during the past six months. Low rates have spurred higher-end buyers into the luxury home market and suburban market, and it’s put more money into people’s pockets as refinance rates on many loan products have moved below 3.000%. Loan volume is at record levels and with forbearance and delinquencies tracking lower, banks are lending with more confidence and removing some of the more-restrictive COVID-19 overlays. This is helping our self-employed borrowers gain access to attractive rates and terms on more opaque loan requests. Unless you believe U.S. interest rates will go negative, any improvement in interest rates from these historically low levels will require lenders willing to take less yield to gain more loan volume. We continue to encourage all of our borrowers who have not refinanced within the last six months to review their loan documents to determine if a refinance is worthwhile. In many instances, better terms can be achieved.