This week marks the 10-year anniversary of the Lehman Brothers collapse. Some reflection on this historic and painful day is in order. The collapse of Lehman Brothers was the darkest hour in the U.S. housing market crash. To summarize, it was a direct result of years of lax and very risky loan underwriting, which included loans on properties with no down payment or no verifiable income or assets, toxic pay-option ARM’s (amongst many other poorly underwritten residential and commercial loans), and the subsequent bundling of these mortgage into complex securities, which were misleading and much riskier than investors thought.
The U.S. government’s response to this financial catastrophe was a massive federal bailout to backstop our entire financial system in order to jump-start the economy and restore business confidence. The massive failure of our financial system led to years of strict underwriting and a new era of regulations on residential home loans. Fast forward ten years and bank underwriting remains intelligent and rigid, although we are seeing some more creative products return to the market to serve the self-employed. Borrowers in the markets we serve appear to be doing well (U.S. unemployment is under 4.00%) and home values have returned to their pre-recession levels or higher, in most major markets.
With interest rates on the rise, the Fed is now attempting to normalize interest rates in order to stave off the next potential bubble. As interest rates move higher, what happens next is anyone’s guess, but I believe we will see a slowdown in home appreciation as well as more volatility in both the stock and the commercial real estate markets. Inflation remains muted but is definitely beginning to show signs of reviving. Business confidence is high and while the flattening of the yield curve is of some concern, most economic strategists don’t foresee a recession in the cards anytime soon. To summarize the sentiment of most of our clients, “business is good.”
With all of that said, we continue to remain cautious with respect to interest rates as the 10-year Treasury note sits a tick under 3.00%. With the economy doing well and the Federal Reserve committed to moving short-term interest rates higher, there are many more reasons for rates to move higher rather than lower at the moment and locking in rates remains the right decision.