Market Commentary 1/05/2024

December Jobs Report Keeps Rates Flat

A better-than-expected Jobs Report pushed interest rates above 4% this morning before retreating down. A deeper dive into the Jobs Report suggests the jobs market may be cooling off. With a drop in the participation rate, more temp workers are unable to find jobs and more people accepting part-time work or working fewer hours. Employers remain cautious about firing workers given the difficulty experienced in replacing those workers during COVID and post-COVID. Of additional concern is wage growth, which is still running at 4% plus, a number higher than the Fed would like to see. On Wall Street, some believe the report was good enough to keep the Fed on pause through at least March, perhaps even longer.  

Inflation has cooled on the goods front, but wage and service inflation are still too high. Geopolitical worries abound including the Israel-Palestine conflict, which is starting to create issues with major shipping vessels navigating the Strait of Hormuz, causing a rise in shipping costs and potentially oil prices. The worry here is that one wrong move could spark a regional war which could have unintended consequences, including an oil spike, which could complicate the Fed’s inflation fight.  However, that is an obvious problem so the markets may have already priced in this outcome. One never does know.

We have spoken previously about the path to 5% mortgage rates and we are getting closer. One requirement to reaching this goal is that the mortgage spreads over Treasuries must continue to compress. The Wall Street Journal reported today that this is finally happening, with the expectation that should Treasury rates fall further, the mortgage spread would also follow.

A big reason spreads have been so wide is that banks and investors have been concerned about a drop in interest rates and the refinance risk associated with those drops. With the quick decline from 5% to 4% in the 10-year treasury, lenders are starting to get more competitive on pricing. In addition, another tailwind for real estate brokers and mortgage originators alike is the start of a new year and new volume targets so pricing remains sharp, which has led to much-improved activity to establish the year.

A quick look at programs and types of borrowers

  • High Net worth with banking:                      
    • Rates from 5.250%/6.196% APR. Loan amounts up to $25M
  • Complex high net worth with banking:         
    • Rates from 6.000%/6.488%. Loan amounts to $10M
  • Traditional Jumbo:                                                
    • Rates from 6.000%/6.488%. Loan amounts to $4M
  • No Income Verification Loans:                         
    • Rates from 7.500%/7.603%. Loan amounts up to $2.5M
  • Conforming Loans:                                               
    • Rates from 5.875%/6.032%. Loan amounts up to $1,149,825

Happy New Year!

Market Commentary 12.15.2023

Fed Forecast To Bring Down Rates Pushes Mortgage Rates Lower

The recent dovish pivot by the Federal Reserve, along with projections of up to three rate cuts next year, brought a sigh of relief to the markets. Equities, bonds, gold, and oil, all rallied in response. This shift by the Fed signaled a so-called “soft-landing” narrative. Inflation data has been pointing toward lower inflation as the economy continues to move forward with weak manufacturing data, but a strong service sector.

Mortgage rates also saw a significant drop, with 30-year mortgages now below 6.50%, and adjustable-rate mortgages anticipated to dip below 6%. This is a remarkable change from just a few weeks ago when mortgage products were touching 8%. Let’s delve into the reasons behind this sudden change of heart by the Fed and the markets.

Inflation Trends

Consumer and producer inflation data have been showing positive trends for quite some time. With inflation on the decline, the Fed Funds Rate, currently at 5.37%, stands well above the inflation rate (CPI) of 3.1%. This significant spread is viewed as restrictive, and now the Fed must consider if keeping rates higher for an extended period might do more harm than good. Additionally, signs of a slowing economy are emerging, which further supports the case for lowering interest rates.

Inverted Yield Curve

The yield curve has been inverted for an extended period, and the Fed would like to see it normalize. This normalization would benefit lenders who borrow short and lend long. When long-term interest rates are lower than short-term interest rates, it becomes challenging for lenders to generate profits due to the negative spread. A robust economy requires lenders willing to extend credit. Moreover, the massive US debt and the costs associated with servicing that debt become unsustainable at higher interest rates.

Quantitative Tightening (QT)

The ongoing QT (Quantitative Tightening) may provide the Fed with some flexibility to lower short-term interest rates and allow bonds to run off their balance sheet. Over the past decade, global central banks’ money printing and bond buying have led to enduring issues, as the cost of money became distorted. By lowering the Fed Funds Rate while continuing QT, the Fed remains somewhat restrictive but with a bit less tightening.

Nonetheless, we still anticipate a 10-year Treasury yield north of 4% and encourage clients to pursue financing at these current rates. We believe that the journey from 3% to 2% inflation will be challenging, and the so-called neutral rate of interest will likely settle above 3%. When you add a term premium of 1% to 1.5%, that’s where the 10-year Treasury should find its equilibrium.

10 Year Treasury & Employment

As previously stated, we continue to anticipate a 10-year Treasury yield north of 4% and encourage clients to pursue financing at these current rates. We believe that the journey from 3% to 2% inflation will be challenging, and the so-called neutral rate of interest will likely settle above 3%. Employment remains tight and wages appear to be sticky (and possibly rising again) which will continue to be monitored by the Fed. This could inhibit interest rates from going much lower than current levels.

For the moment, we will take the late-year gift from the Fed of the prospect of lower interest rates which is leading to a big pickup in borrower inquiries.

Market Commentary 12.8.2023

A Quick Read On Rates, Jobs And Housing

A better-than-expected November Jobs Report took some shine off the recent rally in bonds, which had been surging over the past few weeks. The report was positive, but not great, although it did surprise Wall Street as both new hires and unemployment beat economists’ estimates. Something that is of particular concern and a focus of the Federal Reserve is the slight acceleration in wage growth, adding to some uncertainty about when the Fed might change its stance. The direction of interest rates from here is anyone’s guess, but the stronger-than-expected jobs data likely keeps the Fed in the “higher for longer” camp, at least in our opinion.

Anecdotal evidence suggests that the economy might be slowing, based on reports from local business owners. However, this has yet to translate into jobs data or consumer spending. Inflation, while still at elevated levels, seems to be moderating. Nonetheless, high credit card balances, rising delinquencies, and the overall high cost of debt are indications that consumers are feeling some pressure. Despite these concerns, GDP and other economic indicators still point to the economy being in reasonably good shape. Overall, the prediction suggests that the path ahead is challenging.

Turning to the housing market, activity in the existing home market, particularly in Southern California, appears to be picking up. Interest rates have fallen to under 7%, and some well-qualified borrowers are securing rates as low as 5.875%. This has prompted buyers to reenter the market, taking advantage of small price reductions and more reasonable interest rates. Large-scale home builders are employing various strategies to attract buyers, including helping first-time home buyers qualify for mortgages. Although construction loans from banks remain subdued, the private lending market is bustling, offering more expensive financing with greater leverage, something most developers need to initiate projects.

While there has been a downward trend in interest rates, it’s important to note that we may have reached a bottom, at least for now. A few additional thoughts on this matter; first, the Bank of Japan is likely to move away from its negative interest rate policy, which could exert pressure on bonds worldwide. Second, assuming a 3% inflation rate and real economic growth of 1.5%, the 10-year Treasury rate could stabilize around 4.5%, give or take 0.5%. Finally, it’s worth mentioning that historical interest rates have averaged significantly higher than current rates. While the recent rate increases have caused discomfort, part of the pain is due to the steepness of the rate hikes and the extended period during which rates were held at arguably too low levels. Looking ahead, if the spread over treasuries narrows, it’s conceivable that mortgage rates could range from the high 4s to the mid-5s in 2024, potentially providing significant support to the real estate market.

Market Commentary 12/01/2023

Both Bonds & Stocks Rally Into December

November marked an exceptional month for both bonds and equities. Just a few weeks ago, interest rates surged above 5% and sent mortgage markets into a frenzy. Fast forward to today, and we’re witnessing the 10-year Treasury hovering around 4.25%. In addition, lenders are beginning to reduce interest rates. If this trend persists (we discussed this in previous commentaries) mortgage rates in the mid-5% range could become a reality. This is expected to entice buyers who have been sitting on the sidelines, as more affordable mortgage payments beckon.

Having said that, it’s essential to consider the reasons behind this decline in rates. One perspective is that the market anticipates the Fed will lower short-term interest rates next year as inflation subsides. While there’s cautiousness surrounding inflation, given its deep-seated presence in the economy, the consensus leans toward a more extended timeline to control it. Nevertheless, dovish Fed statements, coupled with moderating inflation data, have relaxed financial conditions as evidenced in the lower interest rates and now flourishing stock market. While there’s optimism that the Fed will engineer a soft landing, reflecting Wall Street’s current sentiment, the recent rally underscores the market’s exuberance. Our concerns are centered around the possibility of eased financial conditions rekindling inflation.

Another narrative suggests that interest rates are declining as bond traders assess the broader economy, indicating an economic slowdown. Assuming a 3% inflation rate and 1.5% GDP growth, a 10-year Treasury around 4.5% appears plausible. For now, the downward rate movement should be acknowledged and leveraged, given that borrowing costs have decreased by 0.50 to 0.75 basis points across the board. This is a significant development.

This year, regions primarily driven by the existing homes market like Southern California have faced challenges. Recently there has been a significant uptick in activity over the past few weeks, encompassing refinance, purchase, and construction loan requests. The drop in interest rates is fostering momentum, and we are encouraged by the resurgence of inquiries. After a challenging year, it’s heartening to hear the phones ringing again. To hear borrowers express enthusiasm about the prospect of interest rates stabilizing at acceptable levels. A welcome development timed for the holiday season. 

Market Commentary 11/17/2023

Mortgage Rates Ease as Inflation Data Arrives Better Than Expected 

Interest rates continue to settle around 4.500% on the 10-year Treasury, with emerging signs of easing inflation and potentially achieving a soft landing for the economy (meaning no recession or a mild one).  Having observed the markets for a considerable time and recalling the challenges the Fed faced wrangling inflation in the 1970s and 1980s, we maintain a cautious stance. We believe the Fed will keep rates higher for an extended period, even though they are likely done with rate hikes for now. 

We are closely monitoring Treasury issuance, given that the US debt load exceeds a concerning $33 trillion. Managing this massive debt ultimately depends on the reduction of interest rates over time. Hence, it is imperative for the Fed to navigate the inflation challenge skillfully. Should they ease too early, there’s the risk of rapid inflation, necessitating rate hikes and possibly the destabilizing of the global economy. Conversely, tightening too much could squeeze businesses and banks, possibly harming the economy unnecessarily. 

The recent drop in interest rates is a welcome development. As we previously mentioned, there’s a chance for adjustable-rate mortgages on residential real estate to settle below 6%. Such a move would be highly beneficial for housing and commercial real estate. With the recent rate decline, our office has witnessed an uptick in larger purchases as buyers cautiously re-enter the market. While underwriting remains challenging, some lenders are making sensible decisions for well-qualified borrowers. Additionally, smaller banks, in their quest for loan volume, are willing to forgo income documentation for borrowers with strong credit, at least 40% home equity, and a willingness to deposit funds with their bank. 

Housing, however, continues to face challenges. Homebuilder sentiment dipped when mortgage rates briefly touched 8%. Housing starts remain sluggish as construction lenders remain cautious and concerned about construction costs as well as affordability. We’re also detecting a broader economic slowdown, influenced by higher interest rates and a 30% surge in most goods prices over the past few years, just as pandemic stimulus funding tapers off. Nonetheless, low unemployment and the resilience of the US economy should not be underestimated. 

Market Commentary 11/4/2023

Fed’s Commentary Eases Bond Market As Yields Fall

Both bond prices (yields move inversely to price) and equities moved higher this week. This event was spurred by what many believe to be the end of the Federal Reserve’s rate-hiking cycle. Unemployment and manufacturing data came in worse than expected. When coupled with the commentary on rising subprime auto delinquencies, signs indicate that consumers, especially those on the lower end, are reaching their financial limits. It’s hard to believe that less than two weeks ago, the markets were quite worried about the 10-year Treasury touching 5%. However, the all-important 5% threshold was breached but never did close above that critical level.

In this classic “bad news is good news” situation for both bonds and stocks, the markets have found comfort in the 10-year falling back down to around 4.5%. Assuming the 10-year stays at this level, and that mortgage term premiums shrink, it is not impossible to see mortgage rates in the mid-5s. This would be welcomed news for mortgage originators and real estate brokers alike.

It is important to note that the volatile moves in US government bonds are not healthy, which makes lending decisions quite difficult. Watching bonds move over 50 basis points in three days is rare and emblematic of the varying views on economic and geopolitical risks. The relaxation of bond yields suggests that traders were either expecting a much more hawkish Federal Chairman, that geopolitical risks are rising, or that the economy is deteriorating, as supported by the fall in oil prices.

While the world is in a heightened state of anxiety, lower rates have the potential to encourage risk-taking, refinances for real estate and businesses, as well as a renewal in purchases of big-ticket items like homes, autos, and machinery. The real estate market was frozen when conforming loans touched nearly 8% late last month, as lenders feared the 10-year would quickly run well above 5%. That risk has been significantly reduced by this week’s action in the bond market, and we are happy to report this positive development.

Market Commentary 10/27/2023

Even the Experts Perplexed By Market

10/27/2023 Market Sector Watch, CNBC

If you find yourself puzzled by the current state of the markets, you’re not alone. We’ve engaged in extensive conversations with experts from various sectors over the past week, and here’s a glimpse of their insights.

Hedge Fund Manager & Distressed Debt Manager

The landscape has become perplexing. The economy seems to be slowing down, yet consumers are still spending. Interest rates remain relatively stable, even in the face of adverse news. Surprisingly, positive tech stock numbers have had little impact on the overall market. We’re exploring opportunities in subprime credit, but our bids are struggling to gain traction due to excess liquidity and intense competition. It underscores the tremendous cash influx in recent years, and perhaps the Fed’s restraint hasn’t been stringent enough. Nonetheless, there are signs of an economic slowdown, with consumers depleting their savings. Subprime auto loans are showing signs of significant stress, a concerning development.

Head of Lending at a Large Warehouse Bank

Housing prices have held steady despite soaring rates, largely because a significant number of individuals secured mortgages below 5%. This has limited the housing supply and kept prices elevated, even as mortgage rates have tripled in some cases. While there’s a possibility of rates plummeting due to geopolitical risks, such as a three-front war or escalation, it’s currently more of a low-probability scenario than a base-case expectation. We are carefully watching the market and may pull back on some lending lines should there be more deterioration in the bond market.

Regional Home Builder

We’re witnessing robust activity, but rising input and interest rates, along with increased incentives, have eroded our profitability. We’re now investing in better technology to meticulously manage costs. We were caught off guard by how off our cost estimates were, and this realization came too late.

Plastic Surgeon

Despite continued customer demand for aesthetic procedures, there’s an increasing trend of customers seeking financing for these services. Strangely, September was not a strong month for us.

E-Commerce Marketing Firm

We’re busier than ever, with numerous businesses transitioning to fully automated e-commerce platforms. For many companies still relying on legacy systems, it’s a do-or-die situation, so there’s no sign of slowing down.

Owner of a Large Toyota Dealership

Business is good but not great, but there are indications of a slowdown as inventory accumulates, and supply chains face challenges.

Multiple Realtors

There are deals in the market, but the competition remains fierce, especially in the 1 to 4 million dollar price range in Southern California.

When considering all the perspectives together, where does this leave us?

Consumers continue to spend, but perhaps years of low rates and a robust economy have created a sense of complacency. Yet, indicators like subprime debt and certain high-frequency metrics suggest a slowdown. Inflation has ceased its ascent but remains distant from the Fed’s 2% target. Savings are dwindling. Until now, the real estate sector has been relatively unscathed, with the primary impact felt in office properties. However, with 5% Treasury rates looming, other segments are likely to feel the effects. Equities had a challenging week, even in the wake of a nearly 5% GDP growth report, leaving a somber mood. Our sense, if we were to hazard a guess, is that the economy might be on the brink of a recession. However, it’s worth acknowledging that those who’ve been on recession watch have been premature in their predictions. With two job openings for every job seeker, the job market remains tight.

Market Commentary 10/20/2023

10-Year Hits 16-Year High as Fed Extends Higher Rates Push  

In these uncertain times, geopolitical risks rightly dominate headlines. However, the expected “flight to quality” trade, where U.S. interest rates typically decrease as investors seek the safety of government-guaranteed bonds during conflicts, has been notably absent. The primary reason appears to be that substantial government spending has overwhelmed the bond market, in addition to major foreign holders of U.S. debt becoming sellers. Currently, the private sector, including businesses, individuals, and funds, has stepped in to fill this gap. Still, without foreign support, it is likely that bond yields will not fall by much if at all. 

Despite the recent poor performance of the equity market, overall economic data remains relatively strong. Retail spending data released earlier this week indicates that consumers are still spending, albeit more cautiously. Additionally, initial jobless claims came in lower than expected, which underscores an increasingly tight labor market. Even so, it is unlikely that the Fed will raise short-term interest rates at their next meeting, even though the data suggests otherwise. This is because the longer end of the yield curve is rising, with 10-year Treasuries grazing 5% before finally settling at 4.91% on Friday morning. The 10-year Treasury note rate serves as the benchmark for pricing all forms of personal, real estate, and business debt. The rapid increase in yields on this instrument is adding pressure to all types of borrowers, so the Fed may allow the market to contribute to slowing down the economy. 

Loans, Rates, and Real Estate

Real estate, which is highly sensitive to interest rates, continues to face challenges. It is difficult to gauge precisely how higher rates have affected prices due to sluggish sales. However, builder sentiment is declining, and new home sales show signs of following suit, despite incentives offered by home builders such as buy-downs and free upgrades. The commercial lending markets are under significant pressure, as a 5% 10-year Treasury rate is expected to push cap rate floors to 6% or even higher. Private debt funds providing bridge loans remain active, while traditional banks are cautious on most deals. With many billions of dollars in loan resets scheduled for 2024, the commercial lending market is shaping up to be remarkably interesting. 

We have said it before and will reiterate that in today’s market, independent mortgage brokers with a wide range of lending options are providing value to potential borrowers. The significant disparity in rates from one bank to another often reflects the bank’s perception of the economy, the housing market, or the local area, rather than market conditions alone. Large banks are keeping their margins healthy, except for their high-net-worth clients. Brokers are once again making a meaningful difference. 

Insignia Mortgage Welcomes Patrick McKenna

We are excited to share the latest addition to our all-star team at Insignia Mortgage, Patrick McKenna, a seasoned broker associate. Patrick brings a wealth of experience and expertise to our organization, having been in the mortgage industry since 1997. His success in the lending business is truly exceptional. In 2003, Patrick founded Direct Financial Group Inc. in Irvine, CA, and quickly grew it to $1b per year in loan fundings. He has also worked at Union Bank, Banc of California, and CS Financial.  Most recently, he held the position of President at Palisades Funding, Inc., a boutique mortgage brokerage in Pacific Palisades, CA that catered to high-net individuals and developer-financing needs. He is currently the President of Palisades Development Company Inc., a high-end property developer. In addition to all his accolades in the mortgage industry, Patrick has an MBA and BA. Insignia Mortgage looks forward to providing an even higher level of success and elevated service to our clients, with Patrick on board.  

Patrick McKenna

“I am thrilled to be working with Insignia Mortgage as their loan programs, knowledge of the industry and professionalism will go hand in hand with my clientele in helping fund their mortgage needs.  Insignia really has become the premier loan origination company and it’s an honor to work with everyone involved.”

Learn more about Insignia Mortgages’ individualized lending solutions and why we are California’s Jumbo Loan Experts. Connect with us today at (link to contact us page).  

Market Commentary 10/13/2023

Signs of Aggravated Inflation on Horizon Despite Geopolitical Worries 

The world is rapidly becoming a more perilous place, as we all witnessed the horrific attacks by Hamas on innocent Israeli civilians. Israel’s response is still unfolding. There is a growing concern about a full-scale, multi-front war, involving Israel and its neighboring countries. There are significant global implications with any decision. Meanwhile, tensions continue to escalate between Ukraine and Russia, with an assertive China adding to the complexity. The United States finds itself stretched thin as it works to maintain global stability. 

One might expect bond yields to experience a sharp decline in response to increased uncertainty, often seen as a “flight to safety” trade. However, massive government bond issuance, coupled with higher-than-expected readings in both the Producer Price Index and Consumer Price Index, have prevented yields from dropping dramatically. Inflation remains a pressing issue in our country, with consumer inflation surging by approximately 20% over the past two and a half years. This places a significant burden on most families, as wages fail to rise proportionally. 

The challenge of home affordability continues to plague the housing market, leading to a sense of stagnation. Nevertheless, existing home inventory is gradually increasing, and as homes linger on the market, sellers may be inclined to lower prices to attract buyers. We are hearing anecdotally from our network of realtors and appraisers that the Southern California market is displaying signs of softening. However, sellers remain hesitant to reduce prices. With the Federal Reserve maintaining a stance of “higher for longer” on interest rates, the likelihood of rates decreasing remains low. Consequently, supply and demand will need to find equilibrium, necessitating lower real estate prices at some point. 

The Fed’s Lag Effects & Real Estate 

The commercial CMBS (Commercial Mortgage-Backed Securities) debt market carries a high likelihood of experiencing a wave of defaults. Many real estate investors will soon face challenging decisions as their debt matures in 2024 and beyond. Banks are tightening their lending standards. With cap rates on the rise, commercial real estate will continue to face pressure in the coming years as prices adjust to higher cap rates, resulting in lower valuations. Additionally, numerous construction projects are being put on hold with debt financing costs reaching 10% or higher. The lag effects of the Fed’s interest rate policies are beginning to ripple through the financial system. 

For those of us who have built our careers in real estate, whether on the acquisition or lending side… This period is widely regarded as one of the most challenging in real estate history. Why? We are confronted with a multitude of challenges simultaneously. Residential real estate prices remain high, with little sign of significant softening. The interest rate environment is at a 20-year high, making homeownership unattainable for many due to a lack of affordability. Moreover, many banks are either unable or unwilling to lend, as they grapple with balance sheet issues stemming from the prolonged period of low interest rates. After the 2008 financial crisis, banks were eager to lend as rates dropped, and government programs stabilized the markets, providing tailwinds for real estate brokers and lenders. Now, the Fed is pushing for home price depreciation as a means to combat inflation. 

Given the formidable landscape, only the most dedicated individuals will thrive in this market as transaction volume remains sluggish. At Insignia Mortgage, we are seizing this opportunity to connect with past borrowers, realtors, and referral partners, offering updates on niche lending programs that can assist potential buyers or those seeking to refinance. We are proactively reaching out to local lenders to establish new relationships, as some banks are in need of lending capacity and are offering unique products with minimal rate markups compared to traditional loan products. Additionally, we are conducting informative sessions at offices, explaining more specialized products like jumbo 2-1 buydowns, cross-collateralized loans, and bridge loans that address immediate needs while we work on securing more permanent financing. Ultimately, our experienced team, with an average of over 20 years in the industry, is committed to providing value to our real estate partners through hard work and expertise.