Market Commentary 07/01/2022

Mortgage Rates Fall As Recession Fears Intensify

Treasury yields quickly raced to well under 3.00% this week. In my opinion, this is not a good sign of things to come. Recession fears have escalated. The long bond acts like this when recession fears rise.  GDP now has economic growth at -2.1%. Micron, a major chip supplier, guided down and reaffirmed what many of us already know. The economy is slowing. The combination of Fed rate hikes and quantitative tightening is a dangerous cocktail for the equity, real estate, and debt markets. I am hearing from several banks that liquidity is quickly drying up. They are weary to lend, and risk spreads have increased. As expected, housing supply has jumped as homeowners look to sell before things get worse, or in some cases unload their second or third home. A violent stock market and bitcoin correction have consumer confidence at a many years low, with liquid savings and retirement accounts down a great deal.  With margins being squeezed and earnings estimates falling, S&P year-end estimates have come down with year-end S&P to be somewhere in the range of 3,200 and 4,100.   

Where Do We Go From Here? Equity, Real Estate, Inflation. 

First, let us start with the equity market. Equities rise and fall and are prone to large drawdowns and rebounds. Many of us got into trouble chasing momentum stocks and high beta tech stocks, which have no earnings power.  Stocks represent ownership in a business, but zero rates and money spraying had fooled many professionals into believing that stocks only go up. The same applies to crypto. 

Two, regarding real estate, price is what you pay, and value is what you get.  Homes are a bit different asset class than other real estate as many homeowners were able to lock in exceptionally low-interest rates. Even if the housing market declines, homeowners will be able to service their debts. Home appreciation over the last few years has been unsustainable. The new listings appearing amidst the dwindling economy warrant the need for a correction. People are becoming increasingly cautious. As interest rates return to the historical mean, speculation will lighten, and buyers and sellers can enter a more even playing field.   

Three, the Fed will beat inflation. It is already happening. It will occur at a significant cost and over time, but inflation will come down. The Fed’s tools are very good at breaking inflation (higher rates and quantitative tightening). The collective negative sentiment compounded with quickly deteriorating financial conditions indicates the need for the Fed to halt its rate-hiking cycle expeditiously. The 2-year Treasury has fallen mightily the last few days which supports the notion of fewer rate hikes ahead.

Finally, it is important to remember that this is a long game. Absent the last 20 years or so, recessions and rebounds were much more common.  Recessions clean out the financial system and are healthy.  Speculators are taught about assessing risk, bad companies die off – clearing the way for new more innovative businesses, and prices reset allowing investors to buy assets for cheaper.  While I may be negative on the markets currently, I am always bullish on America. We have so much to be grateful for, even in tough times.

Have a great 4th of July.

Market Commentary 6/17/2022

Fed Committed To Fighting Inflation With .75 BP Rate Hike…Expect More To Come.

“Don’t fight the Fed” was last week’s theme. Until recently, many of us failed to understand that this statement is tantamount to their management over both easing and tightening cycles.  As stated previously, the Fed’s primary concern is inflation. Their policy decisions will be centered around curbing inflation. Should housing, crypto, or equities continue to get crushed, the Fed will not intervene. The great washout has begun. The Fed is reducing liquidity from the markets by raising short-term interest rates and letting bonds run off their balance sheet. In many ways, the equity market is doing a lot of the Fed’s work. As many equities are down from anywhere between 20% to 80%, we can’t help but feel poorer and less eager to spend. This sentiment will make its way through the economy, and eventually help to bring costs down. This includes costs of goods and services, as well as wages, all of which constitute a large business expense for companies.

Adding Salt To The Inflation Wound: Rates & Real Estate

Mortgage rates are back to 2008 levels. Housing starts are down dramatically.  Consumer business confidence is miserable. The pain load placed on our investments is all part of the plan to crush inflation.  It is disappointing that the Fed and Treasury placed their bets on inflation being transitory. Much of this destruction could have been avoided by slowly removing extra-accommodative policies from the financial system last year.  Now, we face a very turbulent financial period. All this amidst having just a glimpse of a return to normalcy after experiencing a once-in-a-century pandemic. Ouch. 

Part of me never thought we would see 6.00% 30-year fixed mortgage rates again in my lifetime. Yet higher rates are upon us. Housing prices have to adjust in the face of higher rates. Mathematically, you cannot have a doubling of interest rates without an adjustment to home values or cap rates on commercial properties. It will take some time for the market to adjust, but there will be an adjustment. Banks are also tightening credit standards as the fear of a recession increases. Personally, I think we are already in a recession. I don’t believe the recession will be too severe, given the strong balance sheets of businesses and a tight labor market.  However, the Fed is committed to slowing the economy down and they will probably succeed. 

Interest-only loans adjustable rate mortgages (ARM’s) will become much more popular with home buyers, especially with the elevated mortgage rates. It seems fairly certain that short-term rates will come back down if inflation readings abate, but only after the Fed raises rates by as much as 300 bp in the next 12 months. Should the S&P fall by another 20% down to around 3,000, it is hard to imagine the Fed would continue the tightening cycle. Those taking short-term ARM”s may benefit from falling rates a couple of years from now.

Market Commentary 6/10/2022

Who’s Most Impacted By Inflation? All Of Us. 

Things are looking grim. Today’s inflation report came in hotter than expected much to the disappointment of the bond and equity markets. Equity markets are getting slammed, while Treasury yields are rising. Today’s report puts the Fed substantially behind the curve on inflation. A dramatic action might be necessary to provide even the smallest form of relief.  Until today, you wouldn’t hear this from most commentators on CNBC – that one cannot take a 75 or 100 bp event totally off the table. This blog has advocated for rate hikes for quite some time and believed a 75 bp hike a few months ago would have been appropriate.  Signaling from the Fed has been very poor, as well as, from the Treasury. Letting inflation run hot was a terrible mistake. Like most Americans, inflation has been evident in our daily purchases for months. Let’s hope the Fed makes the right decisions soon, to avoid recession. It is becoming an increasingly difficult environment to navigate.  In my opinion, inflation, and not the equity or housing market, remains priority number one. So, there will certainly be more pain ahead.

Although consumer and business confidence remains weak, a combination of stock market volatility, the slowing housing market, and 120 oil may be doing some of the work for the Fed. Anecdotally, this week I happened to be out to dinner more than usual, and I noticed that restaurants are less busy. The gas attendant at the local gas station said fewer people are filling up. Bank management is less eager to lend. All these things suggest the economy may already be in recession.  With unemployment at 3.60%, it is hard to envision a major recession taking place. Nonetheless, I am reading about many layoffs, especially in higher-paying jobs such as technology. 

The Housing Market & Our National Reality Check

There is not much good news to talk about. Rising rates and a cooling economy will lead to lower house prices. Supply-constrained markets such as Southern California probably won’t see a big price dip unless the bond market and equity market do not steady, but home prices will come down as demand wanes. This is a positive note for those waiting to buy, but not so much for those who recently bought.

The one benefit of this reset is that wages, the cost of living, and people’s expectations of what a normal rate of return looks like, have gotten a major reality check. There is no such thing as a free lunch, unlimited debt financing, or continued parabolic returns on investments. You can’t spend your way out of inflation. There is now a return to the mean and that is good news for the next generation. Easy money is never easy. Success is earned and above-average returns require skill and thought. 

Market Commentary 5/20/2022

Equity Market Volatility Pushes Bond Yields Lower

It was another week of agonizing volatility in both the bond and equity markets. Big box retailers reported tighter margins due to high inflation. Economists continue to move year-end targets down. One wonders if all of this negativity signifies an end to selling.  S&P touched correction territory before trading higher into the close on Friday.  Long-dated bond yields fell below 2.800%. Trading remains volatile but orderly.  As we have mentioned previously, don’t expect the Fed to step in and backstop the equity or housing market anytime soon.  Inflation is the Fed’s primary concern and they will tolerate a falling equity market and a higher unemployment rate to subdue inflation. Case in point, the WSJ reported that subprime credit delinquencies are rising from historically low levels as the increased cost of food and energy preys on consumers.  Even the wealthy appear to be cutting back on spending. The soaring costs across all corners of the economy are weighing on people’s confidence and willingness to spend.

Impact On Real Estate & The Global Economy 

Limited housing inventory will keep home prices from falling too dramatically. However, given the wealth destruction incurred in both the bond and equity market, it is difficult to see real estate being impervious to recent events. The dramatic rise in mortgage rates over the last 60 days will push some buyers to the sidelines. 

With China shut down, and the world economy slowing, perhaps long-term interest rates will continue their recent descent. This would be helpful to growth stocks in addition to homebuyers, consumers, and businesses. We hope that long rates don’t move too low, as an inverted yield curve would be worrisome. Housing demand remains healthy, which bodes well overall for the economy.  Should this change, we would become very nervous over a deep recession. 

Next week is important for the markets as the Fed’s favorite inflation gauge, the PCE, is released.  The markets will respond favorably should inflation appear to be topping out.  However, should the reading come in hotter than expected, be prepared for a sobering market reaction. 

 

Market Commentary 1/28/22

Fed Set To Raise Rates Elevates Market Unease

This week’s widely anticipated Fed meeting confirmed to markets that inflation is an ongoing problem. To calm inflation and inflation-related expectations, the Fed is reversing course by running off QE and warning the markets that short-term interest rates will rise this year. They are less concerned about the markets going down, especially given the run-up in asset prices over the last two years.  It is important for investors to understand that the Fed has been very dovish with policy for many years (minus short periods of time that the Fed tried to be more hawkish). It has been understood that the Fed would step in should markets go down. However, with CPI running near 7% and the PCE running near 5%, the Fed is faced with both a mounting inflation problem and a tight employment market, which increases the chances that they will be self-fulfilling.  We believe inflation for goods and services will likely come down, but we are less convinced that wage inflation will cool off. There are simply too many job openings and too few employees willing to fill these jobs. Higher wages will be needed to inspire individuals who have left the workforce back into it. This has pushed the Fed to act on inflation while the U.S. economy is still relatively strong. 

Since the start of 2022, equity, crypto, and bond markets have experienced heightened volatility.  This volatility is probably a good thing in the long term as it will squash speculation (think Meme stocks) and slow growth in asset classes like real estate.  While we all welcome healthy appreciation in the assets we own, outsized year-over-year gains in any market are troubling. Many individuals, especially younger ones, believe markets only go up. That is far from true. 

Volatile equity and crypto markets are positive for the housing market, as individuals seek to buy property for its durability and stability. While rising rates will create more friction between buyers and sellers on an agreed-upon sales price, the stability of owning hard assets cannot be discounted.  Also, lenders remain committed to keeping business flowing. They are taking less of a margin in order to hold down interest rates and lure in prospective borrowers. Keep an eye on the 10-year as it has moved up and is settling in around 1.82%.  A quick rise above 2.22% could be painful for all markets, real estate included. 

Market Commentary 1/14/22

Inflation Tops 40 Year High & Bond Yields Jump

Mortgage rates have risen quickly. As we stated in our previous commentaries, once longer-dated bond yields begin to ascend from historically low levels, the outcome is violent given how quickly interest rates on mortgages move up. This has to do with the way bonds are calculated and the lower level of early payoffs from refinancing transactions as rates rise. The equity markets have also been hurt by rising rates and 40-year high consumer inflation readings. The Fed has admitted inflation is a bigger than expected problem and that it’s time to wind down QE measures by March, as well as start raising short-term interest rates. Thirty-year mortgage rates are now selling well above 3.25%, a dramatic move in percentage terms compared to only a few weeks ago. As inflation outpaces jobs gains, the rise in the cost of goods and services makes our country more vulnerable. From hourly workers to the elderly on a fixed income, inflation is a hidden tax. The Fed is behind the curve due to their extraordinary money printing policies enacted in part with Congress due to COVID-19. Prices in equities and real estate will adjust, but with so much liquidity in the system, we wouldn’t expect major down drifts in value. 

Now, the good news. Inflation on the goods and service side is most likely not structural. Inflation readings should come down over the next 12-18 months. Also, interest rates are still very low. Should bond traders believe the economy is slowing, longer-dated interest rates may not go up that much further. Housing expense remains affordable due to low-interest rates even with housing prices at record highs. A cooling-off of high-risk trading (think crypto and meme stocks) may not be as bad as individuals reassess risk and reward. Finally, the economy remains strong with many millions of job openings. As the Omicron variant (which is more contagious but much less virulent) makes its way through our population, we may finally be able to put the pandemic in the rearview mirror. This should be good for spending and increasing overall economic productivity, as individuals come together again without concern of infection.

However, crosscurrents are everywhere. We are keeping a close eye on the Treasury yield curve, volatility indexes, and consumer confidence readings as signs for where we may go in the coming months. Follow the Fed has been good advice for a long time. We are actively contacting clients and encouraging them to apply for still very attractive loan terms, albeit off the all-time lows. Now is not the time to be complacent. 

Market Commentary 10/22/21

There is a growing sense that the U.S. markets are fully priced. That does not mean that U.S. equities, crypto, and real estate assets cannot go higher, or that bond yields will immediately shoot up. The Fed is making it clear in its messaging that inflation is becoming more of a concern, and that it’s time to begin reducing the extraordinary monetary stimulus that served the U.S. economy well during the Covid pandemic. Many economists believe that the Fed will announce tapering at the next Fed meeting in November. 

By back-stopping the bond market and including BBB-rated bonds, there’s no dispute the Fed’s actions have created inflation. This includes the act of pumping the printing press with transfer payments in a way never before imagined in response to a once in a 100-year pandemic. The big question is determining how the world has changed post-Covid and if we’re entering a new period of sustained inflation. With help-wanted signs everywhere and companies of all sizes paying up for employees, it is starting to feel as if there is a changing dynamic within the workforce. Surprisingly, employees are not being lured in by these higher wages. Perhaps this is due to the incredible rise in home valuation, or in part by how much money has been made trading stocks and crypto. With the pandemic waning, the next few months of economic data will be closely be monitored to determine if employment rates drop as Federal stimulus payments end and Americans continue to get vaccinated; or if something else is at work. Consumer inflation is also at near 30-year highs. We continue to be told that bottlenecks and supply chains are the cause of rising costs but this theory is losing steam as inflation holds firm. 

Home sales remain very active and borrowers remain well qualified. The pace of transactions has slowed a bit, but that may be good for the market and bring in more sellers. Mortgage banks are providing attractive financing options for larger-sized purchases, especially for those borrowers with hard to analyze income. Refinance volume is slowing as expected. It may be a now or never for those borrowers looking to lock in ultra-low interest rates as the 10 year U.S. Treasury touched above 1.700% on Friday before settling in a bit lower.  With inflation running hot and the Fed exiting the bond purchase market, bond traders will begin demanding higher yields. 

insigniablog-4-9-21

Market Commentary 4/9/21

Bond Yields Hold Steady Despite Higher Inflation Data

It comes as no surprise that inflation is picking up. All you have to do is read about the surging costs of lumber, food, oil, copper, and other manufacturing-related products. Lack of affordable housing and non-affordable housing in many states (think CA) has pushed prices up in many parts of the country. The Fed continues to downplay this acceleration of prices as transitory and controllable as it continues to buy over $120B in bonds each month, creating an interesting dynamic between inflation and interest rates. What consumers are feeling in their pocketbooks is what counts at the end of the day, and it is hard to argue there is no inflation, in that context.  

PPI data came in extremely hot today at 1% versus expected .4%. We expect CPI data next week to beat expectations. The combination of pent-up consumer demand, mass vaccinations, and increased business activity are all underway. However, the bond market is taking this data in stride for the moment, as is the stock market. The likelihood of lower rates seems improbable with an improving economy. The Fed continues to be the main buyer of U.S. treasuries. The size of the supply has just become too much for most institutions and governments to bid on in scale. Should bond traders lose faith in Fed policy, 10-year Treasury rates could move up above 2% fairly quickly.  

The counterargument to higher interest rates is higher taxes. Higher corporate taxes and personal taxes will drag down earnings, higher-paying jobs, discretionary spending, and CAPEX spending. This could cool off economic growth and stock market acceleration which would be to the benefit of bonds. Rates above 1.75% on the 10-year Treasury could be of concern. How long this “Goldilocks environment” can sustain is anyone’s guess. Jamie Dimon, JP Morgan’s CEO, thinks we can see the combination of growth and low rates through 2023. However, many other market experts feel rates will move higher by the end of the year. With that in mind, we are encouraging our clients to take advantage of this low rate environment today versus waiting for lower rates at some time in the future.

Neil-blog

Why Having a CPA on Your Mortgage Team Puts You a Step Ahead: Meet Neil Patel, CPA

Most people in the mortgage business do not have a tax background, but Neil Patel, a licensed mortgage broker at Insignia Mortgage has a special superpower; he is also a Certified Public Accountant. Patel’s comprehensive business management and tax experience enable him to better structure loans for the unique, complex financial situations of high net worth individuals. In today’s environment, determining what type of loan is best for particular circumstances is no longer simple—even for individuals with traditional, predictable income streams. This task becomes all the more complicated when non-traditional cash flows are present, such as with foreign nationals, real estate investors, and others who are self-employed. Patel specializes in sourcing financing for high net worth individuals and for the complex loans that are Insignia Mortgage’s specialty.

A Southern Californian through and through, Patel grew up in Orange County, went to school in San Diego, and landed in Los Angeles. He graduated from University of California San Diego in 2011 with a BA in Economics and a minor in Accounting. Prior to joining Insignia Mortgage in 2014, Patel studied for and earned his CPA while working at accounting firms Schonwit & Company and Stuart A Ditsky, CPA PC. He is currently a board member for the CalCPA Los Angeles chapter and maintains his CPA designation through 40 hours of Continuing Education credits per year, which typically include conferences and classes. Patel also obtained his real estate salesperson license and mortgage license through the NMLS in 2014, enabling him to work under brokers to bring in business. As Patel transitioned from underwriting files and analytical work to generating business at Insignia Mortgage, he earned his real estate broker’s license. This designation allows Patel to directly generate business for his firm, something he’s aspired toward since starting at Insignia. “In the next few years, I hope to bring in more business for Insignia through extensive networking and meeting with as many realtors as possible,” says Patel. “I’m hoping these activities will attract a greater number of well-qualified buyers.”

The youngest broker at Insignia Mortgage, Patel also caters to millennial and first-time home buyers. “As a millennial myself, I can relate to the issues specific to this stage of life,” comments Patel. He explains that there is one constant when it comes to lending: when approving, banks look to past cash flows. “I work with those individuals who are still highly qualified, but due to their profession, age, or other circumstance, their tax returns do not convey their true net worth.” In other words, the income verification process becomes incredibly convoluted and involved. That’s where Patel comes in.

Patel’s CPA specialization helps him work with real estate investor clients. For example, if an investor is looking for a loan to purchase and flip a property, the likelihood of approval decreases due to the associated risk. While the buyer is investing in the potential for future cash flows from the property, this “potential” does not carry any weight with the bank. When approving loans, banks solely take into account previous cash flows. Patel understands the nuances of such situations, and how to best package and present information to the bank for loan approval.

Patel and his team recently had a client who owned over 25 tax entities and 20 properties, who was planning to purchase an $8.5 million primary residence. Insignia was able to solidify 55% lender financing by creating a corporation with a foreign trust as the beneficiary. The details included a $4.75 million loan, 7/1 ARM, 3.788% APR, no prepayment penalty on a 30-year term, and a 40-day close of escrow. In other no tax return loan scenarios, Patel may prepare other alternative financial documentation such as recent self-employed income verification, CPA-prepared profit-and-loss statements and balance sheets, divorce and retiree income, real estate schedules, and liquid asset statements.

Patel also recently helped structure a deal for a foreign corporate executive client’s $6 million second home purchase with 60% lender financing (despite a lack of U.S. income, credit, or assets). Patel and his team worked with the client’s advisors, both foreign and domestic, to structure the purchase as tax-efficiently as possible. The complex tactics and creativity used to craft these loan structures are almost limitless.

As with any independent mortgage broker, Patel’s core responsibility is shopping around to find the best rate and terms for a particular applicant. Where he adds significant value, however, is acting as a project manager to get the best loan approved—and approved quickly. Through his deep expertise in complex tax returns and lending, Patel knows what bankers need to see and how to see it in order to approve the loan. Adds Patel, “I look forward to continually amplifying our benefit for clients through my professional experience unique to the field. Not many people can say they are a mortgage broker and a CPA.”

In the mortgage business, each deal is a team effort. Patel’s expertise as a double threat—mortgage broker and CPA—offers tremendous value to any Insignia Mortgage client.

What You Can Expect Working with Neil Patel, CPA:

  • A high skill set in tax returns and complex financials to better structure mortgage loans
  • Tax and business management experience, establishing deep expertise and understanding of high net worth financials
  • Loan implications of numerous non-traditional financial circumstances of buyers, including foreign nationals, real estate investors, millennials, and the self-employed
  • Creativity and knowledge of various intricate mortgage loan structures
  • Perhaps a round of golf or a meal at a nice restaurant with the self-proclaimed “foodie”

Contact Neil today at
Phone: 424-488-3566
Email: neil@insigniamortgage.com
CA BRE: #01952615 NMLS: #1179478