Blog - Insignia Mortgage

Market Commentary 10/15/21

Posted on October 15, 2021 by Admin

Banks kicked off earning season with the major banks reporting positive growth, inspiring the equity markets to move higher. Although inflation is becoming a bigger concern, the market has momentarily put those worries to the side. Interest rates have drifted lower, which is perplexing, as the cost of all goods (food, gas, rent, materials) show no signs of lowering. Supply chains and lack of available workers are delaying the delivery of goods and also increasing costs. Companies are having to pay up for workers and there is some worry that the Fed is being pushed into a corner it will not easily be able to get out of unless it restricts monetary policy in a way that could upset markets. Should the bond market change its feeling about inflation, interest rates will move up quickly. One cannot underestimate the Fed’s ability to buy up the market, impose interest curve controls or other measures to contain interest rate volatility. However, while Fed policy is effective in creating demand, very low rates may actually be creating more demand than the supply side can handle. With no lack of demand in the U.S. for goods and with 11 million job openings, one has to wonder if we have reached the limits of what monetary policy is capable of. There seems to be more money chasing fewer goods (think autos, homes, washing machines, etc) and an increased threat of structural inflation.

China’s property market is of some concern as several trillion dollars of real estate corporate debt are at risk. Most don’t think what is happening in China will have a negative impact on the U.S., but some worry is warranted given the size of the Chinese property market, the size of the leverage, and the unforeseen risks associated with a drawdown on the largest property market in the world may have on the global economy.

Some parts of the U.S. are starting to see a slowdown in home sales. Interest rates are still cheap so that is definitely a major factor for those who are actively looking to buy a new home. The rise in home prices has been dramatic over the last 18 months, and while there is concern about a market top, ultra-low interest rates have kept affordability at reasonable levels. Also, real estate has served as an excellent hedge against inflation historically with investment properties offering some excellent tax write-offs that help to lower ordinary income. One of many reasons that make California the leading residential real estate market is the diversity of businesses within the state. While an expensive state to operate in, it provides many entrepreneurs with such great opportunities. This is reflected in the housing market and many of the mega-homes sales that we read about weekly. Insignia Mortgage is honored to be part of many of these large sales as our expertise in structuring complex loans is a perfect fit in this type of market.

Desk chair in the light - October 8 2021 blog image

Market Commentary 10/8/21

Posted on October 8, 2021 by Damon Germanides

Today’s poor jobs report was a surprise as Covid cases have been declining for the last few weeks. There is a strange dichotomy that has developed in the U.S. labor market. There are over 11 million job openings, yet there has been a continuous decline in the working population. The Labor Force Participation Rate (LFPR) fell to 61.6% as 183,000 people left the labor force. Businesses across the county are offering higher starting salaries and cash perks to attract workers. Higher up the pay scale, policies such as work from home and flexible work schedules with higher wages seem to favor the employee, yet all types of businesses are struggling to fill open positions.

The combination of wage inflation and goods inflation remains top of mind for many economists, along with the fear of a slowing economy and rising costs. With major supply chain disruptions, as well as a lack of workers, the busy fall buying season is shaping up to be one for the ages. Cargo ships at the Port of Los Angeles and Long Beach are backed up for weeks. Dry shipping costs are outrageously expensive. Companies that can pass on the rise in the costs of goods and labor will do so. The big concern is that even with rising wage inflation if the prices of goods go up more than the increase in wages it is still a net loss for lower-paid workers. The massive disruption by Covid will take many months to work itself out and the cost to the consumer is higher prices.

Support for the transitory argument on inflation by the Fed is beginning to wane as the 10-year U.S. Treasury bond is trading above 1.60%. For the moment, the equity market is agnostic to this move higher in bond yields, but should this trend continue, volatility will pick up, especially with high-beta long-duration technology stocks. Rising rates may also cool the red-hot housing market. Even with the rise in housing prices in the last 18 months, ultra-low interest rates have kept payments reasonable and therefore have offset the expensive housing market. With a high probability that the Fed will need to begin tapering its bond purchases by the end of this year, rates could move up meaningfully. Absent Fed QE, time will tell what the market will require for bond and mortgage yields to catch a bid and how other markets will be affected if interest rates drift higher.

Market Commentary 10/1/21

Posted on October 1, 2021 by Damon Germanides

It was another volatile week on Wall Street as bond yields drifted higher and then fell. Inflation remains elevated and Covid-19 continues to wreak havoc on the supply chain and logistical delivery of goods which is a big deal given a great majority of the U.S. economy is consumer-driven.

There was some very good news on the pandemic this morning as Merck announced very positive results from its oral antiviral treatment for Covid. Perhaps the threat of Covid will soon be behind us we all look forward to a return to a more normal way of life.

Congress is grappling with two major spending bills: one aimed at infrastructure and the other focused on societal benefits. Both packages are enormous and should be carefully thought out. The debt-to-GDP ratio is already highly elevated. Each side of the aisle bears responsibility for spending through the years, but now, we are talking about trillions upon trillions of dollars of debt. It will be interesting to see how the bond market responds to the bill’s (or bills’) passage. For now, bond traders have not been bothered about these proposals, and some might argue the way bonds are responding, these bills may not pass or they may end up quite diluted.

Core inflation came in at over a 25-year high this morning. Fed Chairman Powell spoke about his frustration with the ongoing inflation problem but reiterated that the Fed believes inflation will temper in the coming months as the supply chain issues are smoothed out. While we certainly hope inflation does not run hotter for longer, there are some signs that inflation is not going away anytime soon. Once businesses raise prices, these prices remain intact absent a major recession. Also, wage inflation is trending nationwide as many businesses have raised their minimum wages and even offering signing bonuses to attract employees. Powell has the confidence of bond traders still or yields would have spiked this morning after this inflation report came out.

The alternative mortgage market remains very busy. As a leading broker of niche mortgage products in California, we are helping many self-employed borrowers, foreign buyers, and real estate investors obtain financing with attractive interest rates and terms. Our new CDFI program, which does not require a borrower to provide income or employment records, has been especially helpful. These loan amounts are good for up to $3 million and interest rates start in the low 4-percent range for interest-only.

Market Commentary 9/24/21

Posted on September 24, 2021 by Damon Germanides

Equity markets surged after heavy selling of stocks on Monday even as bond yields rose and the 10-year Treasury touched above 1.450%. The “buy the dip” has proven to be a profitable strategy during this recovery, but, rising bond yields may limit gains. The Federal Reserve will soon begin to taper its asset purchases. For the interim, the Fed gave the all-clear on both asset purchases and on raising short term rates and risk-on assets such as equities responded favorably to the messaging from the Fed. However, the move up in bond yields should not be discounted. Interest rates are rising in all developed nations including the U.S.

Last night, Costco and Nike reported earnings, highlighting the impact of logistic, supply chain, and inventory challenges. All of these issues are inflationary and are proving not to be as temporary as the Fed has stated in the past.

How does this all affect housing? Higher bond yields plus inflation, if persistent, will slow down the housing market as homes are expensive nationwide. Potential buyers are justifying paying more by locking in historically low-interest rates. Inflation readings, which may move even higher over the coming months, could dent consumer and business sentiment. A lot will depend on how the Fed navigates monetary policy in the coming months. Major housing supply issues have provided high support levels for home prices. If rates move up to much this will affect the ability of homeowners to qualify for mortgages.

In summary, we see many headwinds to the ongoing economic expansion even as the equity market parties on. Caution remains warranted and for our borrowers, that means locking in interest rates at still very attractive levels.

Market Commentary 9/17/21

Posted on September 17, 2021 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.

Market Commentary 9/10/21

Posted on September 10, 2021 by Damon Germanides

We continue to remember the many souls who perished on 9/11.

Wholesale inflation continues to run hot but an easing of month-over-month increases supports the idea that inflationary pressures may prove transitory. However, transitory remains a moving target on the inflation debate as all of us continue to witness ongoing rises in prices in wages and commodities. These price pressures are pinching the wallets of middle and lower-income wage earners in a way that we have not seen for a long time. While we think some parts of inflation will recede, that may not be true for inflation as a whole. There could be far-reaching negative implications for the economy if the Fed is wrong in its view on inflation.

Interest rates have risen but for the moment appear range-bound. The 10-year U.S. treasury has bounced around from the high 1.2s to mid 1.3s. Equities had a bad week with no huge down days, but it was a slow daily drawdown and poor overall breadth.

The big question is what will propel equities higher or encourage people to buy real estate? Are low interest rates and the threat of inflation enough of a draw to lure in buyers at these prices? Caution seems warranted for now due to multiple factors: we’re heading into fall; Congress is working through the debt ceiling and trillion-dollar stimulus packages which will add to the national debt in a way few could have imagined a few years ago.

We are starting to see choppy income from self-employed borrowers as they attempt to refinance or buy homes. This is a direct result of the damage done by Covid. This is making underwriting loans more difficult. Thankfully, Insignia works with lending partners who are willing to read between the lines or make judgment calls based on information beyond one poor tax filing.

Market Commentary 9/3/21

Posted on September 3, 2021 by Damon Germanides

Friday’s August 2021 job report was a big miss. The consensus was that 750,000 new jobs were expected but the number was woefully lower. Bond yields initially fell, but then rose as inside the report it was noted that wages increased faster than expected in a sign that structural inflation is ramping up faster than forecasters have predicted. If wage growth at this level is sustained, it could lead to a further rise of costs of goods and services. The Delta variant specifically hurt the travel and leisure industry as there were no job increases in this sector. The unemployment rate did fall to 5.20% but remember that number only counts people actively seeking work.

The big question facing the Fed in the coming months is whether it is justified to continue to purchase $120 billion per month in Treasury and MBS bonds. Massive Fed stimulus has had direct positive impacts on financial assets including equities and homes prices. However, as home prices surge around the country, some are beginning to wonder if this program is still needed as the pinch of inflation is beginning to be felt by low-end workers the most. These workers see no benefit from low rates as they are not invested in the market and most are not homeowners.

Our feeling is the Fed will probably taper, but not next month. Bill Gross, the former bond king, sees the 10-year moving up to 2.000% next year. Even some Fed members have opined on the need to scale back bond-buying as this program was not designed to assist supply-side issues in the economy. Employers all over the country are looking for workers and goods and service prices are rising as supply chain issues delay or limit how much of these goods and services can be made and shipped. Some are also beginning to worry from afar about stagflation, the combination of a slowing workforce and rising prices.

Keep an eye out for Fed speak, increased volatility in the equities market, and the direction of the 10-year bond in the coming weeks. As we enter a historically volatile part of the year for the markets, the added concerns over Fed policy could make for some tough days ahead. However, one must keep in perspective the incredible run in equities and housing over the last year and a half should markets move lower.

Product Highlight: As housing has gotten more expensive, lenders have come up with more inclusionary loan programs, including CDFI lending, which does not consider tax returns as part of the loan approval process. These loans are priced higher than traditional loans and requiring a 25% down payment have become very attractive products for self-employed borrowers. The lender offers loans up to $3 million. Interest-only options are available. Contact us to learn more.

Market Commentary 8/27/21

Posted on August 27, 2021 by Damon Germanides

The markets shrugged off the chaotic situation in Afghanistan as many Americans were left with heavy hearts after yesterday’s events. Years ago this type of event would have had a big impact on the markets, but as the world has changed so have the manner in which these awful developments are digested by the markets.

However, all eyes were on the Jackson Hole virtual summit this morning and the Fed did not disappoint. A dovish Fed speech by chairman Jerome Powell eased bond pressures and helped lift stocks on Friday. While the Fed will most likely begin to taper its bond and mortgage-backed security purchases later in the year, but Chairman Powell’s comments remain extremely dovish. With full employment still far off, an increase in Covid cases, and a slow down in consumer spending, Powell did his best to not spook the markets. However, inflation is everywhere. The Fed’s favorite inflation indicator, the PCE, came in a touch lower, but still at 30-year highs. As we have discussed previously, certain costs such as lumber (which has retreated significantly from peaks), used cars, and micro-processors will prove to be transitory, but other costs such as wages and housing costs will prove to be stickier. The Fed’s goal of encouraging inflation with a focus on wage inflation only makes sense if core goods and services don’t inflate more than inflation. This is what the Fed is betting on and only time will tell if it will be a good or bad policy decision.

For the moment, the bond market is on the side of the Fed. This is encouraging the flight of capital to fixed assets such as equities and real estate. One famed bond manager stated that equities are expensive but a better investment than bonds. Low bond yields have helped consumers and corporations alike lower their debt burden, raise cash cheaply, or buy assets with attractive debt. All this has helped our economy recover very quickly from a once-in-a-lifetime pandemic. The markets are richly valued and while caution is warranted, animal spirits are alive and well.

Non-traditional mortgage products are dominating the news as the pool of traditional borrowers have had a long period of time to refinance into very low-interest rates, and buyers are stretching as home prices have soared. At Insignia Mortgage, we are seeing great demand for these products at the moment, especially amongst the self-employed whose income can be choppy and the bulk of their owned assets may be held inside corporations or other entities.

Market Commentary 8/20/21

Posted on August 20, 2021 by Damon Germanides

Bonds Market Eyes On Jackson Hole For Direction On Interest Rates

It was a dramatic week of market swings, surging covid hospitalizations, international conflict, and conflicting messaging by the Fed on the course of monetary policy. The equity markets were very choppy and a look at the averages was not representative of the draw-down many equities experienced this week. Volatility rose, retail sales softened, and the prospect of continued QE increased as the Delta variant continues to create havoc. While a full shutdown of our economy is unlikely, the virus is slowing down certain sectors of the economy. Economists have lowered GDP estimates and consumer sentiment has waned. Many analysts believe the next few months could see volatility rise as the modern world struggles to normalize around Covid. Homebuilders’ sentiment also dropped. How long the Fed can be ultra-accommodative? Inflationary pressures have squeezed margins on everything and as a result, we’re seeing increased pricing across the country. Housing prices are at peak levels and are outpacing income growth.

All eyes will be on the Jackson Hole economic symposium next week in Wyoming when Fed chair Jerome Powell takes the stage to speak on monetary policy. There have been fairly strong sentiments supporting the reduction of QE support of our economy. However, the combination of a poor sentiment reading, international tension, and advancing Covid infections may conspire to reshape the Fed’s view to wait longer. The downside of waiting is inflation. While the inflation readings do show some signs of inflation leveling off, most Americans across the country are feeling the pinch. Small businesses are also hurting as wage inflation eats into profits.

On the mortgage front, the volume has moved to more niche products. Interest rates have been at near historically low levels for over 19 months, and by now many Americans have either purchased or refinance their homes. This has shifted the focus of loan origination to more complex, non-traditional lending. This aligns well with Insignia Mortgage’s expertise working with specialized local lenders, boutique banks, and credit unions to provide these types of complex loan packages for our clients.

Market Commentary 8/13/21

Posted on August 13, 2021 by Damon Germanides

Consumer Sentiment Dims As Rates Push Lower To End The Week

Interest rates dipped on a surprisingly negative consumer sentiment report which was the worst reading since 2011. The report was a surprise given the strength of the economy over the past many months and considering the positive trends in inflation, individual finances, and employment. Earlier this week, reports of tapering inflation were welcomed news to the stock and bond market. However, producer prices ran hotter than expected, so the direction for inflation remains a bit unknown.

Fed members have started talking about initiating bond tapering as we see improvements in employment, increased housing prices, and stronger personal finances. Some voting Fed members are pushing for a tightening of asset purchases in September. However, Fed Chair Powell has been adamant that he wants to run the economy hot for longer even with robust GDP growth and the highest inflation readings in years. A cross-current of thinking abounds on where we go from here, but a careful eye must be kept on the bond market in the coming weeks for signals on the overall health of the consumer and potential supply chain disruptions due to the Delta variant and impacts on retail in the US and globally.