Blog - Insignia Mortgage

Market Commentary 7/23/21

Posted on July 23, 2021 by Damon Germanides

Bond Markets Await Big Inflation Reading Next Week

Equity markets started the week with a big downdraft but have rebounded to new highs. Bonds dipped and then rebounded. This all supports the notion that we should expect to see more volatility in the coming months. While equity markets appear fully priced, the bond market’s paltry yields will continue to support riskier behavior. This will bode well for equities and alternative assets including real estate and private equity.

Central banks continue to reinforce low rates for longer as the Delta variant spreads and creates more uncertainty about the pandemic and how it will affect the reopening of the world’s economy.

Next week will be an important one as the Fed’s favorite inflation indicator, the core PCE, reports for June. Inflation is front-page news and the debates are ongoing about whether inflation is transitory or sticky. It will be interesting to see the responses from both sides on the current state of inflation. Bond yields will be on edge as it awaits this critical report.

Mortgage rates have held up well during this time. While it is hard to argue for lower interest rates as the economy improves, the Delta variant has increased the risk of a market setback which has helped keep interest rates low.

Market Commentary 7/16/21

Posted on July 16, 2021 by Admin

Refinances Surge As Bond Yields Drop

Bond rates continue to dip even as inflation readings run hotter than expected. It is true that some inflation appears to be transitory as evidenced by the expected drop in used car prices and the dramatic fall in lumber costs. However, other costs such as wage inflation are stickier and probably here to stay. Finally, housing costs, which have yet to fully appear in inflation readings yet, will begin to affect the report in a bigger way and should keep inflation readings elevated.

Another factor to consider is that the global central banks have pumped unprecedented amounts of liquidity into the market which has distorted all price discovery, including bond prices. Also, the U.S. interest rates remain some of the highest in the developed world. It is ironic that a country such as Greece has lower bond yields than the U.S. while being a much worse credit risk. Should the markets become untethered from the Fed’s belief in inflation being transitory, rates will move up quickly. The next couple of months will be very interesting and could lead to much more volatile markets. Potential borrowers who have not taken advantage of these ultra-low interest rates should do so while the window is still open. It is hard to imagine with such strong economic growth that the Fed keeps short-term rates pegged at zero for as long as originally projected.

As we move into the middle of summer, purchase and refinance applications remain robust. Low-interest rates continue to drive purchase-money business, but there appears to be a pause in-home price increases as we have seen a very healthy increase over the past year that is not sustainable. Lenders remain eager to lend and non-QM programs are helping borrowers who do not fit inside traditional banks.

Market Commentary 7/9/21

Posted on July 9, 2021 by Damon Germanides

Rates Fall Then Rise As Markets Await Key Inflation Data

Bond yields fell mid-week and then recovered Friday. The drop in bond yields appears to be due to technical moves more than concerns about a slowing economy. The more virulent Delta variant of Covid is spreading widely and swiftly, potentially threatening to dampen the global economy.

Some economists are concerned about “stagflation” as a result of falling yields while inflation is rising. For the moment, the economy remains strong and those fears are not justified. Yet with central banks pumping trillions of dollars into the financial system, true price discovery and market independence have been lost. Therefore, we should be cautious about the unknowns of these never-before-seen policies. With equities and housing at record levels, volatility could pick up in the back half of the year. Next week, all eyes will be on key inflation data. Should the print be hotter than expected, the Fed will be under pressure to do more sooner. This could have a big impact on all markets.

Mortgage volume in the jumbo sector remains robust. Borrowers are eager to close on either refinances or new purchases, as evidenced by the high volume of SBA loans, commercial building purchases, and high-end residential purchases. Low interest rates locked-in long-term are helping buyers justify the high cost of homeownership.

Market Commentary 7/2/21

Posted on July 2, 2021 by Damon Germanides

Bond Yields Dip On June’s Jobs Report

A better than expected June jobs report was met with a small bond rally. While the headline numbers were good, the bond market response to the report suggests bond traders may be expecting a slowing economy in the months ahead. However, given the Fed’s involvement in the markets, true price discovery has been subdued as the Fed gobbles up over $120 billion of dollars of bonds each month. Also helping to push bond yields lower was a bond-friendly print on hourly wage increases which increased less than expected. Inflation is the arch-enemy of bonds and if wage inflation proves to be transitory that would be good for keeping bond yields lower for longer.

This Fed-friendly jobs report may allow the Fed to keep ultra-accommodative monetary policies in place longer. The equities market will respond favorably, especially high-beta long-duration tech stocks. There is some concern that the Fed has hurt homeownership as ultra-low rates have pushed many housing markets up to record levels, making it very difficult for first-time home buyers and lower-income buyers to gain access to the housing market.

With rates under 1.500% on the 10-year Treasury, we continue to recommend taking advantage of this. We’re in a uniquely fortunate period where you can lock in an interest rate lower than printed inflation. Times like this don’t last forever.

Market Commentary 6/25/21

Posted on June 25, 2021 by Damon Germanides

Core Inflation Readings Push Yields Up
Core inflation came in hot, but not hotter than expected. Bonds reacted by pushing yields above up. However, within the report, spending slowed a bit in May and incomes flattened. A slowing in spending is good for the Fed. It will also allow them to continue to print money and prevent them from lifting rates quickly. However, assuming that pandemic-related illness rates in the U.S. continue to decline, the Fed will need to pull back on some of the extraordinary policies that were enacted to combat Covid’s impact on the economy.

Equities have responded well to the Fed’s messaging. A new infrastructure plan will create another boost to the economy and will create good new job opportunities.

Rising housing prices are beginning to create issues for borrowers, especially in the lower-income tiers, as the combination of rising prices and higher interest rates affect home affordability. If rates do move higher, housing prices will need to adjust.

Interest rates remain low but could move up sooner than expected if inflation is deemed more structural and less transitory by investors and economists. We continue to advise clients to take advantage of these ultra-accommodative interest rates and to lock in long-term financing as a hedge against inflation.

Market Commentary 6/18/21

Posted on June 18, 2021 by Damon Germanides

Fed Talks Of Tapering Drives Rates Lower – Go Figure

The Fed’s shift in policy acknowledged inflation is running hotter than expected. They also confirmed that the tapering of the Covid emergency policy responses was met with big inter-week swings in interest rates and increased volatility in equities. We will see if this change in Fed policy will create the so-called “Taper Tantrum” that we witnessed the last time the Fed tried to unwind its ultra-easy fiscal policies. However, with the 10-year Treasury around 1.500%, interest rates are still very attractive. This ultra-low interest rate environment has encouraged prospective buyers of all assets (stocks, real estate, crypto) to take on more risk either by buying real estate at elevated prices, purchasing stocks over bonds, or hedging dollar depreciation by buying alternative assets.

A lack of housing supply continues to nudge prices higher. However, affordability is becoming a big problem. If interest rates move up, there will need to be an adjustment in the supply and demand equation, and home prices will be under pressure. We are starting to see appraisals unable to come in at value on certain purchases. With the pandemic waning, perhaps buyers will not be so eager to stay in escrow, especially if the home does not appraise.

Non-QM or alternative lending is really picking up steam. Lenders are pushing products out to the non-traditional borrower in a manner I have not seen in many years. Thankfully, lenders are keeping the loan to values reasonable so borrowers still have real skin in the game. Loans to foreign nationals, no income verification loans, and asset-based loans are all back with a vengeance. Insignia is placing loans with many lenders and are closing transaction up to $15 MM with very low-interest rates and interest only. The search for yield is driving the products and it will be interesting to see what happens if interest rates rise.

Market Commentary 6/11/21

Posted on June 11, 2021 by Damon Germanides

Mortgage Rates Lower Surprisingly As Inflation Picks Up

It’s hard to make heads or tails as to why bond rates have fallen as of late in response to very hot inflation readings. Bond yields have been driven lower, helped in part by central bankers championing ultra-easy monetary policy and longer QE. The old adage that the cure for inflating input costs and consumer goods is even higher costs, which may have peaked in May. This idea has considerable support and it has become part of the Fed’s transitory inflation thesis. However, the Fed is seeing its desired response on wage inflation take hold (higher wages), but higher wages are not transitory. Once an employer raises wages, it is nearly impossible to reduce them later. The hope is that wage inflation sticks around and goods inflation recedes. The risk is a return to an inflationary world or even worse, stagflation. We are watching unprecedented fiscal and monetary intervention in real-time on a global scale which could have unintended consequences.

Given the dip in interest rates, there seems to be little room for rates to move lower. With CPI data running at 5.00% year over year, real interest rates are running negative. At the important Fed meeting next week, Fed Chairman Powell will need to provide clarity as to why an improving economy with over 9 million available jobs, needs more stimulus and why interest rates should be prevented from normalizing. We are certainly in crazy times.

With the 10-year Treasury note near 1.500%, many strategists are firming up their belief that now is the time to refinance your mortgage. If prices in your zip code have risen, low rates may still make it worthwhile to buy a new home. We recommend locking in longer-duration mortgages because if trends shift direction, then higher mortgage rates could be here for quite a while.

Market Commentary 6/4/21

Posted on June 4, 2021 by Damon Germanides

Good But Not Great Jobs Report Pushes Mortgage Rates Lower

Interest rates rallied as the May jobs report was a good one but not quite what the forecasters predicted. Weekly unemployment data improved as the United States continues to recover from the pandemic. Fed commentary about the May jobs report reinforced that ultra-accommodative policy will keep pace until the Fed’s goal of full employment is met. The jobs report supports that thesis for the moment. The unemployment rate clocked in at 5.80% with still nearly 8 million jobs to fill.

We have often commented that the Fed is encouraging inflation which is now making its way through the economy as both wages and goods have risen. It is hard to argue that wages are transitory as wage increases are sticky, but some goods and service price increases could fall as supply and demand rebalance, and for the moment the bond market and the Fed appear to be in agreement that inflation will not be a problem. Yet, CPI and other inflation readings indicated that costs have soared, a burden for everyday Americans. If inflation is feistier than expected, rates will move up quickly as a countermeasure.

Traditional loan volume is ebbing as many borrowers have either purchased or refinanced their homes by now. However, alternative sources of real estate financing with attractive terms are helping borrowers who have complex financials, nuanced income, less than perfect credit, or other non-traditional circumstances. Insignia Mortgage continues to see strong demand for loans, especially in this niche area of the market. Finally, we continue to encourage former and current borrowers to take advantage of these very low rates because nothing lasts forever.

Market Commentary 5/28/21

Posted on May 28, 2021 by Damon Germanides

Mortgage Rates Stay Low As Inflation Debate Heats Up

The Fed’s favorite inflation reading, Core PCE, rose the most since 1960 and clocked in at 3.10% annually for April. This came as no surprise as everyone is seeing what inflation looks like when they pay their bills at the end of each month. The bond market waived off the report as no big deal as bond yields are lower in light trading. Perhaps the White House’s $6 trillion budget proposal and all the new taxation associated with it is keeping bond traders calm. Higher taxes will curtail spending on goods and services which will lower demand and in theory, could prove the Fed right that inflation is transitory. However, there is cause for concern as businesses, especially smaller businesses, can only absorb so much in added cost before being forced to raise prices. Also, the spread between home prices versus home affordability has stretched and should be monitored.

Many goods and services are out of stock which has led to more demand than supply and therefore price increases. In my experience, once prices rise except for commodities, they rarely come down. This is the counterargument for a more structural move in inflation and not the transitory one coming out of the Fed. Also, wage inflation is taking shape. Due to a lack of workers, businesses are paying more for employees. Again, in my many years in business once you offer someone a higher salary it is hard to take it away. With this in mind, if the Fed is wrong in its position on inflation, the back half of this year could be volatile. If interest rates rise further than expected due to a change in inflation trajectory, there will be shifts in home purchase and home refinance demand as well as a re-pricing of high beta stocks that are using near-zero discount rates. We continue to advocate that borrowers should not wait to lock in historically low interest rates as inflationary pressures grow.

Market Commentary 5/21/21

Posted on May 21, 2021 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.