Market Commentary 3/15/2024

Hot Inflation Data Takes The Shine Out of Bonds

Hotter-than-expected CPI and PPI data caused bond traders to adjust their expectations on Fed rate cuts, causing a decline in US Treasuries. Despite a decent jobs report indicating continued hiring, many Americans are taking on multiple jobs to cope with rising costs. For example, everyday goods are significantly more expensive than pre-Covid times. On top of that, job creation has been predominantly driven by necessity rather than productivity-enhancing employment.

Nevertheless, the economy displays resilience amidst many negative factors, including credit card and auto-loan defaults, geopolitical tensions, and oil prices hovering around $80 per barrel. Speculative investments in AI, daily options, and crypto remain robust. Such data suggests that financial conditions may not be as tight as anticipated, potentially leading to Fed rate cut disappointments. Although rate cuts would be welcomed, market dynamics currently support a narrative of 1-3 cuts rather than the 6 cuts expected at the beginning of the year. We should gain more clarity on the path of interest rates next week when the Japanese and US Central Banks meet. Japan is expected to move away from negative interest rate policies. 

Despite the rise in Treasuries, mortgage rates remain relatively stable. Banks and financial firms continue to maintain razor-thin margins in an increasingly competitive market. With refinance activity at a 20-year low, success in today’s mortgage market hinges on strong relationships with realtors and financial planners.

Although many homeowners benefit from low-rate mortgages, other expenses such as credit card interest, insurance, margin debt, and household costs continue to rise. The prolonged period of low interest rates has led to an accumulation of homes, with homeowners staying put longer than historical norms. However, signs suggest this trend may be shifting. According to Zillow in February, homeowners in some regions are increasingly likely to list their properties for sale. 

Regarding the recent NAR settlement and its potential impact on commissions, no lenders have yet offered financing options for buyers. This significant ruling is expected to reshape buyer-seller interactions in real estate transactions, and we will continue to monitor and provide updates as necessary.

Market Commentary 03/01/2024

How Non-Traditional Mortgages Are Benefiting From Animal Spirits

Speculation and momentum are driving many public markets, from cryptocurrencies and zero-day options to companies at the forefront of AI. Even non-fungible tokens are seeing renewed interest. Investors seem willing to take on more risk for less reward, as evidenced by compressed bond and equity spreads. Expectations of higher interest rates persist, yet animal spirits remain strong, suggesting that financial conditions may not be as tight as feared. The outlook for rate cuts has diminished. Renewed discussion by economists indicates the possibility of only one expected cut (the consensus of 3 cuts remains).

Interestingly, in the residential mortgage market, non-traditional lenders are competitively pricing single-family, mortgages. Borrowers with some income documentation, good credit, and a larger down payment, may secure mortgages at rates in the mid-6s. This represents a significant improvement from just a few months ago, particularly for non-QM products catering to less traditional borrowers. Also, these lenders continue to raise jumbo loan limits. These products, only slightly higher in interest rate than traditional loans, support real estate and mortgage brokers in their accessibility. 

A recent bullish publication featured balloons floating into the sky, which may indicate a sign of market exuberance. Front-page stories often precede market peaks, and while we say this half-heartedly, it’s worth noting. Despite potential headwinds such as geopolitical tensions, higher oil prices, and persistent inflation, the market seems to be discounting them for now. If sentiment turns, bonds could rally. This would push mortgage yields lower right in time for the spring buying season.

Market Commentary 02/23/2024


The Promise Of AI & How It Will Affect Real Estate

As the promises of artificial intelligence (AI) and machine learning continue to propel equity markets, significant transformation lies ahead for various industries, including the mortgage business. While this shift may evoke both excitement and apprehension, embracing AI-driven processes offers the potential for increased efficiency, streamlined operations, and enhanced profitability.

But why is a real estate newsletter delving into the realm of AI? The answer lies in recognizing AI as a disruptive technology poised to revolutionize our lives akin to milestones like the automobile and flight. Moreover, it serves as a deflationary force, gradually reducing costs across goods and services.

In the context of residential real estate and mortgage origination, AI has the potential to identify promising prospects within each of our networks by leveraging vast computing power to assess probabilities. For realtors, AI can pinpoint prospective buyers or sellers based on life circumstances or shifts in employment status and provide real-time triggers. 

This forward-looking optimism in the market has implications for interest rates, likely keeping them elevated for longer periods due to positive economic outlooks. As equity markets surge and financial conditions ease, individuals are inclined to spend more. Such increased activity prevents inflation from being lowered, delaying the anticipated rate cuts by the Federal Reserve. Consequently, interest rates have risen, with conforming loans hovering in the mid to upper 6% range, and jumbo loans around 6%.

In line with our assessment, a major Wall Street research firm has reached a similar conclusion: the overall expense of retaining a home you no longer desire is likely to bolster existing inventory. This is particularly true with rents on the decline and so many multi-family units becoming available. Such a trend has the potential to ease some of the strain on housing affordability and open up fresh opportunities in the real estate market.

Market Commentary 02/16/2024

 

Inflation Proves Sticky As Interest Rates Rise

We are sensing not all is well in the world and that it’s time to be mindful that the rise in equities doesn’t tell the whole story. For those who follow these things, company after company is laying off workers suggesting that the unemployment rate may be headed higher. Commercial real estate loan portfolios held by large banks are increasingly at risk. The US debt now well above $34 trillion is no longer tomorrow’s problem.  Massive Treasury issuance in the coming months may put additional pressure on bond yields.

Of additional concern is a hotter-than-expected CPI print, and the stickiness of service-related inflation. Friday brought yet another disappointing inflation report, with the PPI or wholesale inflation readings leveling off.  As we have suggested in past commentaries, inflation is a tricky beast, and bringing it down to 2% from current levels will take time. This has pushed out the odds of the first-rate cut to June from March, which was the belief of the markets a short while ago. 

We are now left with the higher for longer interest rates story, which we think should increase the supply of homes and bring down home pricing over time. Outside a person’s mortgage as a reason to keep their home, there is the dramatic rise in the costs to maintain the home along with the cost of insurance, as well as the climbing expense of overall living, which may work to realtors’ favor this spring (especially for empty nesters). Simply holding on to a home because of a low mortgage makes less economic sense if the other expenses rise enough to offset the benefits. 

On the positive side, the single-family 1-4 lending market remains quite liquid. The combination of big and small banks, mortgage banks, and Life Co firms in the space has created a considerable suite of products. Also, because rates are not likely to go up much further banks are tightening spreads on loans to win deals. 

Listed below are examples of some of the more interesting products:

  • 1st mortgages up to 80% to $10M and 75% to $20M with rates starting a touch above 6%
  • 1st mortgages with 10% down program available up to $3M with rates starting above 7%
  • 1st mortgages with 40% down and no income or employment verification loans up to $3.5M. Rates start at mid 7%
  • 1st mortgages crossing other properties with no down payment up to $15M with rates in from 6%-7%
  • Construction loans for personal residences up to 65% of cost to $15M with rates from 6%7%

Market Commentary 02/09/2024

Direction Of Economy Uncertain As S&P Breaks 5K 

If you’re feeling confused about the economy’s trajectory, you’re not alone. As a recap, the stock market has been soaring to new heights driven largely by the optimism surrounding AI. Certain high-frequency indicators like auto and credit card delinquencies have spiked. Inflation levels are off at a rate over 20% higher than in previous years. Finally, many in the US remain unsettled about their future as they are forced to live paycheck to paycheck, even while earning over $100K per year. 

Just weeks ago, Wall Street anticipated six or more rate hikes, but now forecasts have been revised down to perhaps four. Ongoing hints from the Fed suggest potential interest rate reductions by mid-year. We reiterate inflation is public enemy number one and that is why the Fed will move very carefully with rate reductions.  

Despite ongoing challenges, the housing market remains resilient, with homeowners reluctant to part with their low-rate mortgages. Nonetheless, the limited housing supply continues to strain affordability. Paradoxically, lower interest rates could stimulate existing home inventory, alleviating supply constraints and offering more choices to buyers. 

Commercial real estate, particularly office spaces, is facing significant pressure. Prolonged interest rates raised by the Fed may hasten the exposure of poorly underwritten transactions with historically low cap rates, rendering them unfinanceable. Additional events, such as the collapse of a large European real estate fund (as reported in the WSJ) hint at more difficulties ahead for this sector. 

Amidst robust economic data, low unemployment, and a thriving stock market, long-term interest rates are likely to remain relatively stable for now. Our forecast of the 10-year Treasury trading between 4% to 4.5% remains consistent, with inflation settling around 3%. 

Market Commentary 2/02/2024

US Economy Defies Skeptics With Blowout Jobs Number

Skeptics grappling with conflicting data between the substantial increase in state unemployment figures and the recent non-farm payroll data were surprised by the blowout December Jobs Report. It showed that hourly earnings exceeded expectations, and the unemployment rate remained at a low 3.7%. Additionally, treasury yields surged, with the 10-year Treasury rising above 4% mid-day.

Today’s nonfarm payroll report highlights the strength of the US economy while also diminishing the likelihood of a Fed rate reduction in March. The Federal Reserve had recently met and signaled that a rate cut in March was improbable. The stellar earnings from companies like Meta and Amazon, as well as record highs in the stock market further suggest the overall health of the economy, making the Fed question if they should consider rate cuts in a seemingly robust environment. Better to keep rate cut powder dry in the event of a financial accident or deep recession.

Nonetheless, it’s essential to consider the backdrop of numerous layoff announcements. Despite the dominance of big tech companies in financial news, all is not entirely well in the broader economy. A significant regional bank experienced a 40% drop in its stock price due to issues related to its commercial real estate portfolio. UPS, often considered a barometer of economic activity, reported significant layoffs and plans to cut 12,000 jobs. While the exact timing of a potential negative jobs report remains uncertain, there are indications that the economy might be showing signs of weakness. This could lead to lower bond yields later in the year, though perhaps not as soon as initially anticipated by Wall Street.

Inflation is on the decline but may not reach the 2% target anytime soon. Hot wars in the Middle East and robust consumer spending are creating uncertainty on inflation. However, even with a baseline assumption of 3% inflation, the Fed still has room to cut short-term interest rates by as much as 1.00% to 1.5% from the current 5.25%. This would keep rates in a “restrictive territory” without harming the economy and the banking system. Lower rates would particularly benefit real estate activity. The expectation is that rates will trend lower come August.

One consideration for lower rates, even with elevated inflation, is the global surge in government debt, with the US being no exception at over $34 trillion in debt. The Fed is cognizant of this massive liability and might be compelled to lower rates to assist the Treasury in servicing the country’s bill. The size of the US debt is gradually becoming a prominent issue that cannot be ignored any longer.

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).  

Podcast “MPA Talk” Features Damon Germanides

MPA Talk, the podcast for U.S. mortgage professionals by MPA Magazine, featured Insignia co-founder, Damon Germanides, in their latest episode entitled “Serving Up Solutions.” In this episode, host Simon Meadows interviewed Germanides for his perspective as a broker who specializes in complex loans, particularly for those who are self-employed. They discuss how he cut his teeth in the last big financial crisis of 2008, before co-founding Insignia Mortgage in Beverly Hills, California, in 2010. Beginning slowly, the company established relationships with smaller banks and credit unions, to build the business to where it is today. The son of a restaurant owner, Germanides likens the mortgage industry to the restaurant industry in terms of the tough challenges it presents – it’s been his driving force to succeed.

“My dad owned a restaurant for 43 years, an, that business is such an tough business that I used to look at the mortgage business and say, ‘as tough as it is today, man, the restaurant business is, is even tougher’. I’ve picked tough businesses because both of them have their challenges. That was a driving force early in my career, knowing how hard another business was, made me pretty tenacious.

When 2008, 2009 hit, my good analytical skills really started to shine because the business had moved away from the limited information type loans or the no doc loans or whatever. You had to have a complete understanding of the borrower’s financials, which required mortgage professionals to start to learn to read tax returns, understand cash flow, you know, do a sensitivity analysis on revenue and income, understand everything on the borrower’s financials and that, that really fit well with my skillsets.”

Damon Germanides, on why his key skills made him a good fit for the mortgage industry.

Listen to the full episode below, or via your podcast streaming platform of choice.

MPA Talk, July 21, 2023, featuring Damon Germanides, a broker who specializes in complex loans, particularly for those who are self-employed.

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Market Commentary 1/13/2023

Interest Rates Drop As Markets Look Beyond Fed Hikes

First, the good news. Inflation is falling and it appears that the Fed is near the end of its tightening cycle. Odds are that the Fed will raise .25 bp in February and again in March before stopping. While inflation is still excessively high, shipping costs have dropped back to pre-pandemic levels, used autos prices have fallen, and other goods have followed suit. Gasoline prices are lower and the supply chain is functioning much more efficiently. The job market remains tight and that is still of some concern for the Fed. However, the pace of wage increases is lessening. Bond yields and mortgage rates have also lowered as the 10-year Treasury is now around 3.44%.  This has helped bring potential home buyers back into the market. 

Now, the not-so-good news. Negative ISM readings, surging credit card debt, an inverted yield curve, and warnings from CEOs such as Jamie Dimon on the state of the economy have all of us on “recession watch.” Generally, it is hard to bet against the U.S. consumer and business owner. Nonetheless, there are signs that consumers are tapping into credit cards more often to pay for life necessities, and business owners are cutting back on staff and hours of work per week. How this plays out over the next couple of months will be an important sign of where the economy is headed.

The hope remains the Fed will thread the needle and the economy may experience a very mild recession. The strong jobs market supports the no-recession argument, while other economic indicators suggest otherwise. The effects of the Fed’s jumbo rate hikes and quantitative tightening have yet to be discerned, as the monetary policy takes some time to work into the system. Lending standards at banks continue to tighten. The overall rise in short-term rates will affect consumers and business owners this year, as debt service costs increase quite dramatically for debtors who either have a floating rate debt or debt coming due.

Home builders reported soft sales volume. While many builders are offering incentives to lure buyers, builders are holding back on price cuts. Housing valuations have held up well and better than some expected. Why? The combination of a low fixed-rate mortgage, a 10-year + period of strict loan underwriting, and a big move-up in home values is keeping pressure on sellers to cut deals. Should the economy move into a recession later in the year, sellers will be more willing to negotiate or list their property for sale as their finances become strained. For the moment, although the housing markets are slow, the drop in interest rates has got buyers looking again. Given that home affordability is stretched, lower rates are needed to jump-start real estate activity. While interest rates are not likely to move to pandemic levels, our experience is that should mortgage rates settle in under 5.000%, borrowers will respond positively. 

Market Commentary 11/18/2022

Mortgage Rates Continue To Fall In Uncertain World

Over the past several decades, the inverted yield curve has been a tried-and-true recession predictor. With some parts of the year yield at historically wide inversions, financial conditions are becoming too tight. This indicates a strong likelihood that the economy is slowly marching toward a recession. However, there is evidence to the flip side of this argument, including consistently strong employment data, decent capital spending by companies, and a rebounding stock market.

Housing has been hit pretty hard by the 4 super-sized rate hikes by the Fed, with more upset on the horizon with the additional hikes anticipated in December and early next year. The terminal rate should cross 5.00%. Some Fed officials have opined the need to go much higher to stomp out inflation.  A recent Fed study on housing speaks of the potential for a 20% adjustment to prices in specific markets.  Speaking to our market, prices will continue to come down, but the lack of inventory will set a floor for how low prices can go. As long as California continues to be a robust and diversified economy, wealth creation, weather, and opportunity will support prices better than some other parts of the country. Nevertheless, affordable housing remains a big problem on a national level, and the Fed will want to see housing prices fall. Such a decline won’t be as severe in the more undersupplied and desirable areas.

Important Update On Mortgage Products

Insignia Mortgage has located a few portfolio lenders willing to offer very sharp pencils on non-traditional loan products. These non-QM products rely on post-closing reserves more than income analysis.  Loan amounts go up to several million with a 30% down payment. Interest rates begin at 5.00% or so. We share this info because these types of products are crucial for the high-end markets, especially with the move in interest rates. Borrowers are struggling to qualify for loans due to the rapid rise in rates, and the fact that interest-only loans require an additional stress test, making it difficult for well-qualified borrowers to obtain financing.