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.

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.  

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. 

Rates Rise on Strong June Employment Report

Interest rates moved higher on a strong June jobs report. The report caught some on Wall Street off-guard as the U.S. economy continues to improve in the face of the covid pandemic. However, the rising cases due to the Delta variant do present some challenges in the coming months. While mass shutdowns seem unlikely, anything can happen as the world struggles with this new more contagious variant. For the moment, Mr. Market appears to believe that the virus will not cause major economic harm (we sure hope so) and that the road to normalcy remains on track.  

Hedge funds have gotten creamed trying to short the bond market. The dip in bonds last week is partially attributable to a large hedge fund covering a major short position. This depressed rates even further momentarily which made prompted concerns of something more ominous afoot. Rates have since risen from those low levels of last week and increased this week. We’re still a ways off from a 2.00% 10-year Treasury, but bonds seem to be headed modestly higher. Inflation readings in the U.S. and there is support abroad for the idea of some structural inflation, especially with wages. Persistent supply chain issues continue to push up delivery and logistic costs.  

Housing seems to be slowing a bit as the end of summer approaches and the new school session approaches. Given the torrid pace of purchases over the last year and the prices increases, this comes as no surprise. Lenders remain eager and willing to lend. There are now a myriad of ways to qualify borrowers beyond traditional banks. This bodes well for the broker business, especially in California, where we have a large group of borrowers who don’t fit into traditional lending products.