Market Commentary 2/19/21

Mortgage Rates Rise as Covid Cases Drop; U.S. Economy Moves Toward Reopening 

Rates are edging higher as the reflation trade continues to play out. Washington is pushing hard for another stimulus package to the tune of $1.9 trillion, putting pressure on the bond market even as equities stall. Covid cases are dropping fast around the country. We hope this will lead to the beginning of a return to normalcy as vaccinations and herd immunity take hold. If the recovery continues apace, the combination of pent-up demand and consumer confidence could yield very strong economic activity. This is partly why longer-dated interest rates are rising as the markets become more optimistic about a global recovery. 

Speaking of inflation, lumber prices have been on a tear which is causing some home builders to pause or slow down building activities. When the cost of lumber and other related commodities rises, it digs into builders’ profits. It also makes new homes more expensive. This in turn puts the brake on housing, which has been a huge part of our economy in the last year. If long-dated interest rates run higher, we fully expect the Fed to step in and control the yield curve with bond purchases.  

Keep a close eye on the upward slowing yield curve. The 10-year Treasury has quietly moved up to over 1.300%, dampening mortgage refinances. As mentioned previously, the odds of rates going higher seem greater than going lower, so now is the time to apply for a loan and take advantage of this extremely accommodative mortgage rate environment while it lasts.


Market Commentary 2/12/21

As the prospects of a post-lock down world take shape, rates are quietly moving higher, while remaining still historically extremely attractive. The CPI inflation numbers were lower than expected. Food prices such as soy and corn, and other commodities such as oil and lumber costs are moving up. If this trend continues, this may hurt consumption and drag down economic growth while also increasing the prospects of higher interest rates.  

Now is the time to take advantage of the exceptionally low-interest rates that were put into place to offset the downside risks of the pandemic. With Covid cases dropping, we are cheering for a return to normalcy, which will also mean a return to higher rates.  

Low interest rates have played a big part in boosting housing and auto sales, as well as boosting growth stocks and more speculative alternative assets such as Bitcoin. If rates move up too quickly, expect the Fed to intervene. The Fed has been clear that they will cheer on inflation while keeping rates low to help “juice” the economic recovery. However, we believe that the Fed will let rates rise to around 1.50% to 1.75% on the 10-year Treasury before considering yield control policy intervention. 

A downward drift in the stock market could also move rates lower. With many stock indexes globally at or above all-time highs, rates could push lower should there be a pullback.


Market Commentary 2/5/21

Concerns of a heating job market abated with January’s lackluster jobs report. Bond yields began to move up mid-week on a better than expected ADP report and weekly unemployment claims in anticipation of an improving jobs market. The 10-year U.S. Treasury did close above 1.15% for the week, but some of the rate momentum was lost due to slowing jobs numbers. The jobs market has certainly improved from last year, yet there still remains many headwinds. Job improvement is being seen in education, professional, and business services while hospitality, healthcare, and leisure remain underperforming sectors of the economy. The unemployment rate checked in at 6.30%, down from last month’s rate of 6.70%.  

So what will drive rates in the coming months? We see (as do many) three main themes driving interest rates: (1) vaccinations and herd immunity (2) government spending and inflation and (3) business disruption and underemployment. Ultimately, the virus is in charge and will play the biggest role in the global economy’s re-opening and return to normalcy. More normal times portend higher interest rates. Massive quantitative easing, central bank stimulus, and government aid remain top of mind as well. Massive stimulus and government aid will eventually move interest rates higher as it becomes harder to see how all of this borrowing will be paid back. However, for the moment, the Fed is encouraging inflation. So far, it has created inflation in both the equity and real estate markets in the form of higher prices as a result of near-zero interest rates. The Fed is now hoping for wage inflation. While inflation has been feared over the last twenty years, this time may actually be different as the Fed vows to keep rates low even in an inflationary environment. Technological disruption and how business will be conducted post-pandemic also is playing a role. Tech disruption makes businesses more efficient but also costs jobs and in many ways creates deflation. Lack of full employment will force the Fed to keep interest rates low for longer, even after the pandemic passes.  

Housing and housing-related activities have played a big role in keeping the economy moving forward during these most uncertain times. The pandemic has certainly created a once-in-a-lifetime opportunity to lock-in exceptionally low-interest rates. We continue to remain very busy and grateful for our clients. Over the last several months, there was really no need to watch the bond market. However, that is now changing as rates begin to tick up and the yield curve steepens. For the moment, the small uptick in interest rates should not alarm any active borrower, but it may become a bigger factor in the months ahead. 


Market Commentary 01/29/21

The first reading of 4th quarter GDP showed a healthy gain of 4%, a promising number given how many states remain only partially open for business. However, not all is rosy, as weekly unemployment claims remain elevated, and fears of new, more contagious strains of Covid-19 weigh on how long this pandemic will keep us from returning to our normal lives. Vaccinations must be pushed through in a race against time. The more people are vaccinated before a mutation that becomes unaffected by current vaccinations, the sooner we will all be able to return to full employment, travel, go to stores, and eat out. As consumption is 2/3% of the U.S. economy, these activities are essential to rebuilding our workforce and our restarting our economy.

Inflation is making more news lately as it is showing signs of starting to rise. A look back on the cost of oranges, soybeans, and even oil, from a year ago certainly supports the inflation narrative. Homebuilders. while bullish on demand for housing, are concerned about the rise of lumber prices. The Fed is actually encouraging inflation while also stating that if needed they will institute a policy of yield control, by which the Fed would not let rates go above a certain level. We remain wary of such policies, but we understand the Fed prefers inflation to stagflation or deflation. Inflating dollars in the future to pay off debts today is one of the ways out of this massive amount of debt central banks have taken on due to the pandemic.  It also encourages people to own equities and real estate, two asset classes that are a hedge against inflation.  

In what has been a very strange week in the equities markets, i.e., Gamestop, AMC, and Blackberry trading huge volumes as the retail investors squeeze out professional investors who were shorting these stocks. This trading is quite dangerous and may suggest trading in stocks is becoming more game-like, more closely resembling gambling rather than investing. What received less attention was that rates have drifted slightly higher during this week’s spike in volatility, an unusual response as interest rates typically fall when equity markets become volatile. A one-percent 10-year Treasury note rate appears to be the resistance point. With inflation being encouraged by the Fed, we are becoming more aggressive in our recommendation to take advantage of interest rates at this time.


Market Commentary 01/22/21

With the swearing-in of President Joseph R. Biden, a new administration takes the reigns from a most unusual four years. Treasury Secretary Janet Yellen didn’t hold back with her comments to “go big” on stimulus and assistance payments as the country continues to grapple with the coronavirus. Mass vaccination rollouts seem to be picking up steam which is a welcome sign as we all yearn to go back to a normal life. However, there will be some resistance from Congress to pump in another $1.9 trillion in stimulus as $900 billion was just committed not too long ago and has yet to make its way through the economy.  

Fourth-quarter bank earnings were strong overall and reserves for bad loans revised downward. These are all good signs. The yield curve has steepened as well, which will help banks earn more money on loan production. Housing sales remain on fire as people flee big cities for the suburbs or realize the need for a bigger home. Tech earnings from bellwethers IBM and Intel disappointed on Friday, which hurt equities. Interest rates remain over 1% on the 10-year Treasury. As we have stated previously, a 10-year Treasury at 1% is very attractive, and with the Fed encouraging inflation, borrowers are in a position where long-term mortgage financing can run negative versus inflation. For example, if a new mortgage is originated at a 2.75% note rate, but inflation is 3%, the borrower’s real interest rate is -.25%. As wages rise, the borrower will continue to pay the mortgage with inflated dollars, which increases affordability and also consumer spending as more dollars are available to buy other goods and services. Inflation should also help increase the value of the real estate asset, which adds additional consumer confidence.

With this thought in mind, no one knows for sure if inflation will run hot. It has not for over two decades. Many economists are worried about inflation, especially after the unprecedented amount of debt taken out by central banks in response to the pandemic. Our belief is that it’s likelier for rates to move higher than lower, so we continue to encourage borrowers to take advantage of these low interest rates and use this ultra-accommodative environment to refinance into long terms mortgages, or to lock-up a new purchase.


Damon Germanides Featured In Mortgage Professional America 2021

Insignia Mortgage Co-Founder was featured in Mortgage Professional America on January 12, 2021, in an article entitled “How to capture the foreign buyer market when borders reopen.” This article was written by David Kitai, who interviews Germanides on the foreign buyer niche.

“Assuming rates stay low and the dollar stays weak against the basket of foreign currencies there could be big tailwinds for foreigners wanting to buy second homes or investment properties in the United States,” said Damon Germanides (pictured) co-founder of Insignia Mortgage and a specialist in serving foreign buyers. “Typically, your foreign buyer is a well-to-do buyer looking to get a piece of the United States. They should be back assuming travel comes back thanks to a vaccine and herd immunity.”

This is not Germanides’ first time to appear in the industry-leading mortgage publication, and certainly won’t be his last. Read the full article here.


Market Commentary 1/15/21

We are certainly in unusual times. One of the great joys of my job is speaking to people on a daily basis who are much smarter than me. While I understand why the housing market and equities markets have soared during the worst economic period since the Great Depression, it is not at all what I would have thought would have happened. Some great minds also remain perplexed by these events but chalk it up to massive synchronized central bank stimulus, artificially low rates, and transfer payments which have kept consumers spending. What scares the “smart money” is what could derail this momentum, and the most common answer is inflation. 

When and if inflation pops the bubble is anyone’s guess, but with another $1.9 trillion stimulus package promised by President-elect Biden, we are reaching debt levels that are a bit scary. We understand why this needs to be done so we are not arguing against more stimulus, but we are worried about the repercussions long-term of all of this money printing.

With that thought in mind, our focus at Insignia Mortgage is how does all of this affect the mortgage market. Our feeling is that interest rates have seen the lows and that rates will gradually rise. The Fed is encouraging inflation while also telling us that they will control interest rates if rates move up too far. This relationship will work for some time, but should the combination of vaccine (we should have 4 vaccines by end of March) and herd immunity get our economy fully re-opened, I see no reason why interest rate benchmarks such as the 10-year Treasury note will remain at 1%. The one outlier is if the virus mutates and current vaccines become ineffective (to date the U.K mutation is not worrisome but the South African mutation is creating some concern), all bets are off. We hope for all of us that this scenario does not pay out. 

Regarding individual loan transactions, we are biased toward locking-in rates which are at historical lows. The need for business has kept lenders working off of tight net interest margins which has helped affordability greatly as house prices have gone up fairly dramatically in some areas. Even if interest rates drop, many lenders have placed floors on the rates. Overall, our lending sources remain committed to making deals work and are doing all they can to help our clients during these tough times.


Market Commentary 1/8/21

The December jobs report reflected an economic slow-down, which was no surprise given the spike in the virus around the country and the shelter-in-place orders that have displaced many small businesses. The slowing jobs picture also supports more stimulus and with a democratically-controlled government, there is no doubt the printing presses will be ramping up.  

The combination of massive stimulus and very low interest rates has created asset inflation (think stock market and home prices). A rise in asset values has been a great benefit to the economy and has had positive effects on spending and sentiment during these most challenging times. However, while asset inflation has boosted 401ks and home values, wage and price inflation are becoming more of a concern as inflation expectations are rising and could create tensions in the financial markets. We think this is not of immediate worry, but massive money printing does have repercussions, and if inflation runs hot, it could disrupt the equity markets and real estate markets. 

The 10-year Treasury breached 1% and touched the highest levels since last March. Rising rates hurt affordability for home buyers and also make riskier assets less attractive. Don’t get us wrong – as 1% 10-year Treasury is still very attractive; it still does not discount how far bond rates have moved off their lows. Should inflation continue to trend up, rates could move up quickly and banks will be quick to reprice. We are recommending to our clients to move while interest rates remain ultra-attractive.


Market Commentary 12/18/20

As we approach Christmas, rising hopes of a stimulus package continue to circulate. The fiscal stimulus which Fed Chair Powell alluded to in his post-Fed meeting statements will be key to carrying our economy through a tough winter and rising Covid cases. The hope is that the uptake of the newly approved vaccines and resulting herd immunity will speed a return to normalcy by June 2021. The Fed has all but guaranteed zero interest rates through at least 2022. All of this is being done to keep our economy going. We applaud the swiftness of government action during this major crisis after having experienced the 2008 housing crisis. Transfer payments from the government this time around have kept the consumer-based economy grinding through a very unusual time and have probably kept our economy from falling off a cliff. The Fed sees better days ahead with projected 2021 economic growth of 4.50% and unemployment falling to 5%.  

With the Fed holding interest rates at zero and a huge government debt load, there has been little consumer price inflation, but asset prices have soared. It was not expected that household savings would rise during this time. The combination of low rates, swift action by the Fed to backstop the financial markets, and the work-at-home trend has pushed forward housing demand, especially for single-family homes in more suburban areas. Housing plays a huge role in our economy in normal times, but during this pandemic, it has been a crucial provider of employment and consumption.  

Ultimately, our focus is on how Fed policy and economic activity affects interest rates. For the moment, the clear path of no rate hikes will keep interest rates low. Banks will compete for yield and we expect to see more lending options into 2021 as bank and non-bank lenders try to differentiate themselves from one another. This is a great time to be a broker who can match a borrower with the right fitting lender. Insignia Mortgage continues to focus on more opaque borrowers who require more attention and a deeper dive into their financials. Our lenders are eager to close deals and are offering no-limit cash-outs, bank statement only loan programs, interest-only, and loans to real estate investors and foreign nationals.    


Market Commentary 12/11/20

Much to the delight of borrowers, unprecedented levels of quantitive easing by central banks have pushed yields to zero or below in response to the global pandemic. This has helped many larger businesses and qualified households to recapitalize their balance sheets and lower monthly debt service. Residential single-family homes have also been a great asset class to own or borrow against as prices across the country have risen. Retail, office, and hospitality assets in major cities have been less fortunate. With news today that the FDA has approved the Covid-19 vaccines, it will be interesting to see how these industries shake out. So many small business owners are on the brink of failure. Government stimulus will be needed to keep these businesses going until the vaccine makes its way through our society. 

However, with so much money sloshing around, the riskiest assets have soared partly due to the Robinhood investing class moving their favorite stocks higher, partly due to safer assets such as government-guaranteed bonds, high-quality corporate bonds, and CD’s offering paltry interest rates. Equities do feel expensive but nothing says that stocks can’t move higher. TINA (“There Is No Alternative”) comes to mind as investors, pension administrators, and hedge funds need to put money to work somewhere. A quote from Warren Buffet is apropos in today’s market, “Price is what you pay, value is what you get.”

No one thought housing would be as robust as it has been back in the dark days of March of 2020. A quick response by the Fed and Treasury (amongst other central banks) drove interest rates down and helped many potential home buyers needing more space or working remotely move off the sidelines and into new homes. Loan volume has been intense as banks and non-banks price aggressively try to win business. Our local community banks and credit unions, which are where Insignia Mortgage places our more complex loans, have worked hand in hand with our borrowers to facilitate successful transactions. Our lenders are offering attractive rates and terms for our self-employed borrowers, real estate investors, and foreign nationals. Interest-only and cashout loans are readily available.