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Market Commentary 1/28/22

Posted on January 28, 2022 by Damon Germanides

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

Posted on January 14, 2022 by Admin

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

Posted on October 22, 2021 by Admin

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.

Market Commentary 4/9/21

Posted on April 9, 2021 by Damon Germanides

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.

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

Posted on June 13, 2018 by Damon Germanides

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