Tag: global economy

Market Commentary 4/19/2024

Posted on by Damon Germanides

Economic and Geopolitical Pressures Weight On Bonds

Today’s market landscape is challenging to handicap due to global politics and Federal Reserve actions. Risky investments, including high-beta momentum stocks like artificial intelligence, are facing pressure. The market is adjusting to the possibility of fewer rate cuts this year—even just one or none. The Fed has changed course due to ongoing inflation, strong job numbers, solid retail sales, and positive manufacturing data. These factors indicate that rate cuts may be on hold for now. Additionally, with oil prices above $80 per barrel, significant drops in interest rates are unlikely. Despite global efforts to reduce fossil fuel reliance, our economy remains tied to oil, impacting interest rates and inflation.

Interest rates remain higher than expected despite market fluctuations. This persistent high can be attributed to ongoing inflation, a challenging economy, and substantial government debt issuance. The Wall Street Journal reported that mortgage rates for standard loans have risen above 7%. Meanwhile, home sales have dipped during what is typically the busiest season, presenting challenges for buyers facing high prices and limited options in coastal cities.

The rising cost of living may soon affect the housing market. Over time, some homeowners may be compelled to sell to access cash, particularly if equity markets experience corrections. Major companies like Netflix and Nvidia have already seen significant downturns.

It appears that market optimism regarding rate cuts was premature. The recent market dynamics require investors and homebuyers to approach decisions with caution. The Federal Reserve, under its chairman’s leadership, faces a complex scenario that is somewhat concerning. Although the bond market seems oversold, lower rates may not materialize for some time. It is essential to remain vigilant and prepared for various outcomes. Keep a close watch on commercial real estate, as the Fed’s higher-for-longer stance is becoming a significant issue for some asset classes. Remember, volatile times also bring opportunities for well-informed and patient investors.

Market Commentary 02/09/2024

Posted on by Damon Germanides

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

Posted on by Damon Germanides

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.

Market Commentary 1/12/2024

Posted on by Damon Germanides

Bond Market Believes Lower Inflation Here To Stay 

For the moment, the bond market is betting on lower interest rates despite a better-than-expected December Jobs report and a hotter-than-forecast CPI print. PPI, or wholesale inflation, helped reinforce the belief that inflation should continue to trend downward, a view we share but with some skepticism. Several hot spots around the world remain and a flair-up of any could adversely affect both the oil and shipping markets, thus creating inflation. For now, that has not happened, but it does remain a concern. Of additional anxiety is the massive Treasury issuance.  This could push interest rates up, but again, for now, the trend is lower rates.  Expectations of lower inflation and increased business confidence have also improved and there is a sense that the Fed may pull off their so-called “soft landing.” We remain cautiously optimistic. Keep a close eye on the coming earnings seasons as a tell to how the economy is performing. More on this in the coming weeks.

The drop in mortgage rates has inspired new applications as activity is picking up across all markets. Also, mortgage prices have benefited from the compression in the spread, which has been unusually high this past year and remains elevated.  Banks seem to be in a better mood as we enter 2024.  All of this is welcomed after a challenging 2023. The combination of Treasury rates under 4% plus tighter margins is leading to some jumbo lenders now offering rates in the 5.500% with banking.       

Market Commentary 1/05/2024

Posted on by Damon Germanides

December Jobs Report Keeps Rates Flat

A better-than-expected Jobs Report pushed interest rates above 4% this morning before retreating down. A deeper dive into the Jobs Report suggests the jobs market may be cooling off. With a drop in the participation rate, more temp workers are unable to find jobs and more people accepting part-time work or working fewer hours. Employers remain cautious about firing workers given the difficulty experienced in replacing those workers during COVID and post-COVID. Of additional concern is wage growth, which is still running at 4% plus, a number higher than the Fed would like to see. On Wall Street, some believe the report was good enough to keep the Fed on pause through at least March, perhaps even longer.  

Inflation has cooled on the goods front, but wage and service inflation are still too high. Geopolitical worries abound including the Israel-Palestine conflict, which is starting to create issues with major shipping vessels navigating the Strait of Hormuz, causing a rise in shipping costs and potentially oil prices. The worry here is that one wrong move could spark a regional war which could have unintended consequences, including an oil spike, which could complicate the Fed’s inflation fight.  However, that is an obvious problem so the markets may have already priced in this outcome. One never does know.

We have spoken previously about the path to 5% mortgage rates and we are getting closer. One requirement to reaching this goal is that the mortgage spreads over Treasuries must continue to compress. The Wall Street Journal reported today that this is finally happening, with the expectation that should Treasury rates fall further, the mortgage spread would also follow.

A big reason spreads have been so wide is that banks and investors have been concerned about a drop in interest rates and the refinance risk associated with those drops. With the quick decline from 5% to 4% in the 10-year treasury, lenders are starting to get more competitive on pricing. In addition, another tailwind for real estate brokers and mortgage originators alike is the start of a new year and new volume targets so pricing remains sharp, which has led to much-improved activity to establish the year.

A quick look at programs and types of borrowers

  • High Net worth with banking:                      
    • Rates from 5.250%/6.196% APR. Loan amounts up to $25M
  • Complex high net worth with banking:         
    • Rates from 6.000%/6.488%. Loan amounts to $10M
  • Traditional Jumbo:                                                
    • Rates from 6.000%/6.488%. Loan amounts to $4M
  • No Income Verification Loans:                         
    • Rates from 7.500%/7.603%. Loan amounts up to $2.5M
  • Conforming Loans:                                               
    • Rates from 5.875%/6.032%. Loan amounts up to $1,149,825

Happy New Year!

Market Commentary 12.15.2023

Posted on by Damon Germanides

Fed Forecast To Bring Down Rates Pushes Mortgage Rates Lower

The recent dovish pivot by the Federal Reserve, along with projections of up to three rate cuts next year, brought a sigh of relief to the markets. Equities, bonds, gold, and oil, all rallied in response. This shift by the Fed signaled a so-called “soft-landing” narrative. Inflation data has been pointing toward lower inflation as the economy continues to move forward with weak manufacturing data, but a strong service sector.

Mortgage rates also saw a significant drop, with 30-year mortgages now below 6.50%, and adjustable-rate mortgages anticipated to dip below 6%. This is a remarkable change from just a few weeks ago when mortgage products were touching 8%. Let’s delve into the reasons behind this sudden change of heart by the Fed and the markets.

Inflation Trends

Consumer and producer inflation data have been showing positive trends for quite some time. With inflation on the decline, the Fed Funds Rate, currently at 5.37%, stands well above the inflation rate (CPI) of 3.1%. This significant spread is viewed as restrictive, and now the Fed must consider if keeping rates higher for an extended period might do more harm than good. Additionally, signs of a slowing economy are emerging, which further supports the case for lowering interest rates.

Inverted Yield Curve

The yield curve has been inverted for an extended period, and the Fed would like to see it normalize. This normalization would benefit lenders who borrow short and lend long. When long-term interest rates are lower than short-term interest rates, it becomes challenging for lenders to generate profits due to the negative spread. A robust economy requires lenders willing to extend credit. Moreover, the massive US debt and the costs associated with servicing that debt become unsustainable at higher interest rates.

Quantitative Tightening (QT)

The ongoing QT (Quantitative Tightening) may provide the Fed with some flexibility to lower short-term interest rates and allow bonds to run off their balance sheet. Over the past decade, global central banks’ money printing and bond buying have led to enduring issues, as the cost of money became distorted. By lowering the Fed Funds Rate while continuing QT, the Fed remains somewhat restrictive but with a bit less tightening.

Nonetheless, we still anticipate a 10-year Treasury yield north of 4% and encourage clients to pursue financing at these current rates. We believe that the journey from 3% to 2% inflation will be challenging, and the so-called neutral rate of interest will likely settle above 3%. When you add a term premium of 1% to 1.5%, that’s where the 10-year Treasury should find its equilibrium.

10 Year Treasury & Employment

As previously stated, we continue to anticipate a 10-year Treasury yield north of 4% and encourage clients to pursue financing at these current rates. We believe that the journey from 3% to 2% inflation will be challenging, and the so-called neutral rate of interest will likely settle above 3%. Employment remains tight and wages appear to be sticky (and possibly rising again) which will continue to be monitored by the Fed. This could inhibit interest rates from going much lower than current levels.

For the moment, we will take the late-year gift from the Fed of the prospect of lower interest rates which is leading to a big pickup in borrower inquiries.

Market Commentary 10/20/2023

Posted on by Damon Germanides

10-Year Hits 16-Year High as Fed Extends Higher Rates Push  

In these uncertain times, geopolitical risks rightly dominate headlines. However, the expected “flight to quality” trade, where U.S. interest rates typically decrease as investors seek the safety of government-guaranteed bonds during conflicts, has been notably absent. The primary reason appears to be that substantial government spending has overwhelmed the bond market, in addition to major foreign holders of U.S. debt becoming sellers. Currently, the private sector, including businesses, individuals, and funds, has stepped in to fill this gap. Still, without foreign support, it is likely that bond yields will not fall by much if at all. 

Despite the recent poor performance of the equity market, overall economic data remains relatively strong. Retail spending data released earlier this week indicates that consumers are still spending, albeit more cautiously. Additionally, initial jobless claims came in lower than expected, which underscores an increasingly tight labor market. Even so, it is unlikely that the Fed will raise short-term interest rates at their next meeting, even though the data suggests otherwise. This is because the longer end of the yield curve is rising, with 10-year Treasuries grazing 5% before finally settling at 4.91% on Friday morning. The 10-year Treasury note rate serves as the benchmark for pricing all forms of personal, real estate, and business debt. The rapid increase in yields on this instrument is adding pressure to all types of borrowers, so the Fed may allow the market to contribute to slowing down the economy. 

Loans, Rates, and Real Estate

Real estate, which is highly sensitive to interest rates, continues to face challenges. It is difficult to gauge precisely how higher rates have affected prices due to sluggish sales. However, builder sentiment is declining, and new home sales show signs of following suit, despite incentives offered by home builders such as buy-downs and free upgrades. The commercial lending markets are under significant pressure, as a 5% 10-year Treasury rate is expected to push cap rate floors to 6% or even higher. Private debt funds providing bridge loans remain active, while traditional banks are cautious on most deals. With many billions of dollars in loan resets scheduled for 2024, the commercial lending market is shaping up to be remarkably interesting. 

We have said it before and will reiterate that in today’s market, independent mortgage brokers with a wide range of lending options are providing value to potential borrowers. The significant disparity in rates from one bank to another often reflects the bank’s perception of the economy, the housing market, or the local area, rather than market conditions alone. Large banks are keeping their margins healthy, except for their high-net-worth clients. Brokers are once again making a meaningful difference. 

Market Commentary 10/13/2023

Posted on by Damon Germanides

Signs of Aggravated Inflation on Horizon Despite Geopolitical Worries 

The world is rapidly becoming a more perilous place, as we all witnessed the horrific attacks by Hamas on innocent Israeli civilians. Israel’s response is still unfolding. There is a growing concern about a full-scale, multi-front war, involving Israel and its neighboring countries. There are significant global implications with any decision. Meanwhile, tensions continue to escalate between Ukraine and Russia, with an assertive China adding to the complexity. The United States finds itself stretched thin as it works to maintain global stability. 

One might expect bond yields to experience a sharp decline in response to increased uncertainty, often seen as a “flight to safety” trade. However, massive government bond issuance, coupled with higher-than-expected readings in both the Producer Price Index and Consumer Price Index, have prevented yields from dropping dramatically. Inflation remains a pressing issue in our country, with consumer inflation surging by approximately 20% over the past two and a half years. This places a significant burden on most families, as wages fail to rise proportionally. 

The challenge of home affordability continues to plague the housing market, leading to a sense of stagnation. Nevertheless, existing home inventory is gradually increasing, and as homes linger on the market, sellers may be inclined to lower prices to attract buyers. We are hearing anecdotally from our network of realtors and appraisers that the Southern California market is displaying signs of softening. However, sellers remain hesitant to reduce prices. With the Federal Reserve maintaining a stance of “higher for longer” on interest rates, the likelihood of rates decreasing remains low. Consequently, supply and demand will need to find equilibrium, necessitating lower real estate prices at some point. 

The Fed’s Lag Effects & Real Estate 

The commercial CMBS (Commercial Mortgage-Backed Securities) debt market carries a high likelihood of experiencing a wave of defaults. Many real estate investors will soon face challenging decisions as their debt matures in 2024 and beyond. Banks are tightening their lending standards. With cap rates on the rise, commercial real estate will continue to face pressure in the coming years as prices adjust to higher cap rates, resulting in lower valuations. Additionally, numerous construction projects are being put on hold with debt financing costs reaching 10% or higher. The lag effects of the Fed’s interest rate policies are beginning to ripple through the financial system. 

For those of us who have built our careers in real estate, whether on the acquisition or lending side… This period is widely regarded as one of the most challenging in real estate history. Why? We are confronted with a multitude of challenges simultaneously. Residential real estate prices remain high, with little sign of significant softening. The interest rate environment is at a 20-year high, making homeownership unattainable for many due to a lack of affordability. Moreover, many banks are either unable or unwilling to lend, as they grapple with balance sheet issues stemming from the prolonged period of low interest rates. After the 2008 financial crisis, banks were eager to lend as rates dropped, and government programs stabilized the markets, providing tailwinds for real estate brokers and lenders. Now, the Fed is pushing for home price depreciation as a means to combat inflation. 

Given the formidable landscape, only the most dedicated individuals will thrive in this market as transaction volume remains sluggish. At Insignia Mortgage, we are seizing this opportunity to connect with past borrowers, realtors, and referral partners, offering updates on niche lending programs that can assist potential buyers or those seeking to refinance. We are proactively reaching out to local lenders to establish new relationships, as some banks are in need of lending capacity and are offering unique products with minimal rate markups compared to traditional loan products. Additionally, we are conducting informative sessions at offices, explaining more specialized products like jumbo 2-1 buydowns, cross-collateralized loans, and bridge loans that address immediate needs while we work on securing more permanent financing. Ultimately, our experienced team, with an average of over 20 years in the industry, is committed to providing value to our real estate partners through hard work and expertise. 

Market Commentary 8/11/2023

Posted on by Damon Germanides

Rates Can’t Catch A Break  

Although the Fed is making progress in the battle against inflation, a tougher phase awaits in substantially curbing inflation due to the so-called base effects. The forecast for tougher times cemented itself after surpassing last June’s 9 percent plus CPI reading. Some experts on Wall Street anticipate that inflation readings for August may climb higher since July witnessed significant hikes in oil, gas, and other commodity prices. While service and wage inflation has shown moderation, their persistence coupled with recent wholesale inflation figures indicates a larger-than-anticipated rise. Our stance remains that the Fed will not be lowering rates anytime soon, considering the daily struggle of America’s most vulnerable to cope with rising costs. 

The combination of stubborn inflation and a budget deficit of more than 1 trillion dollars puts pressure on US Treasuries and government-guaranteed mortgage debt. Concerned voices are clamoring in response to the size of our debt and its long-term sustainability. Global issues further complicate the US Bond market with Japan’s loosening yield curve control, China and Europe’s economic dilemmas, and the ongoing conflict in Ukraine. Investors are demanding higher yields, a phenomenon reflected in the 10-year Treasury comfortably crossing the 4.00% mark, with longer-term bonds nearing 4.500%. The point at which these elevated yields begin impacting the equity and housing markets is uncertain. However, it is increasingly likely that both sectors will be negatively affected by rising rates. 

We recently emphasized the significance of the Fitch downgrade of the US credit to AA+. Although Wall Street didn’t fully grasp the implications of this situation, the narrative has evolved. Unlike 2011, this downgrade reflects much higher debt/GDP ratios, unsustainable budget deficits, and a more dysfunctional US political system. Whenever the cost of capital is negatively influenced, it deserves serious consideration. 

From our network of banks and lenders, we’re hearing signals that the long and variable impacts of Fed policy are starting to reverberate through the system. Delinquencies and loan modifications on commercial loans are on the rise. Businesses are facing squeezed revenue and operating margins. Credit card balances are soaring. These effects warrant careful observation in the upcoming months. 

Our broker team invests significant time in discovering new lenders, many of whom remain unfamiliar with the market. It might sound biased, but having a robust mortgage broker on your side is crucial in today’s landscape. Transactions are encountering a myriad of issues, and the ability to swiftly pivot to a new lender or solve a problem is invaluable. The Insignia Mortgage broker team excels in both these domains, while also securing the most competitive rates and terms for complex loans. The days of relying solely on one big bank for client loans are long gone. 

During our recent attendance at the Inman conference in Las Vegas, NV, we gathered intriguing insights from various speakers about the market’s current state: 

  • Quicken Loans anticipates improvements in the rate market in the coming months. The drop in mortgage brokers, real estate brokers, and salespersons signifies the existing home market remains somewhat stagnant. While it presents challenges, it could pave the way for those who navigate it successfully. 
  • Traditionally, existing home sales constituted a major portion of the market, but current homeowners are reluctant to move. However, around 25% are planning to relocate within the next few years, aligning with Quicken’s recommendation to persevere. 
  • Zillow predicts that rates will remain high for longer than Wall Street anticipates. Service inflation and housing shortages contribute to inflation, and the focal point for home buyers should be millennials, who are expected to make up 43% of new home buyers. 
  • The mortgage and real estate industry must adapt to AI (Artificial Intelligence), incorporating it into lead generation and follow-up strategies. With AI we can achieve more with less. The challenge lies in how effectively we embrace it. While 20% will seize the opportunity, the remaining 80% might miss out. Those who embrace AI stand to gain efficiency and profitability. 

Market Commentary 7/7/2023

Posted on by Damon Germanides

Yields Rise As Strong Wages All But Ensure Fed Rate Hike

The ADP report this Thursday marked a significant week for the bond market, as both Treasury and Mortgage rates exhibited a notable increase. Fortunately, Friday’s employment report met expectations, easing some pressure on bonds. The probability of the Fed raising rates later this month is now nearly 100%, with elevated wage inflation and the strong job market. In addition, bond traders are realizing that interest rates will remain high for an extended period, due to persistent global inflation and forecasts of potential interest rate hikes in other countries (like the UK).

Some argue for the Fed to exercise patience and assess the long-term effects of their rate hikes on the US consumer and the economy. Despite this pushback, there are signs that the rate increases are making an impact. Banks are becoming more cautious with their underwriting box, consumers are exercising caution in their purchases, manufacturing data is declining, and credit card balances are rising as stimulus funds dwindle. One might wonder where we would be if the AI investment theme didn’t re-ignite animal spirits. Additionally, large apartment investment firms are facing challenges as floating rate debt reaches a tipping point, where monthly interest expenses exceed property cash flow. The pain of higher interest rates is gradually spreading beyond the office sector to other real estate asset classes.

An illustrative example demonstrates the risks of buying at very low cap rates:

  • 2021 Investment Environment Net Operating Income: $100,000 Cap Rate: 3.75% Value: $2,667,666
  • 2023 Investment Environment Net Operating Income: $100,000 Cap Rate: 5.75% Value: $1,739,130

This example equates to a loss of almost 35% on the property due to the movement in cap rates. While we don’t anticipate a systemic crisis in commercial real estate, buyers who relied on aggressive assumptions and maximum leverage may face difficulties ahead.

Rate Hikes & Real Estate: What’s Next?

Higher interest rates are influencing the existing housing market, resulting in continually elevated home prices, despite interest rates returning to 7%. This situation may limit what potential buyers can afford. Furthermore, the potential for an increase in housing supply seems plausible if equity markets reverse course in response to ongoing Fed rate hikes. Sellers may choose to sell their homes while existing home market inventory remains tight, rather than waiting for a recession or other negative events. Notably, the Southern California superluxury market is experiencing a swell in inventory as ultra-wealthy individuals are less inclined to expand their home portfolios. It will be intriguing to observe what factors will entice these buyers back into the market. Only time will reveal the answer.