Tag: global economy

Market Commentary 5/19/2023

Posted on by Damon Germanides

A Tale of Two Housing Markets As Rates Rise 

Even with the rise in interest rates, the limited supply of existing homes for sale is leading to multiple offers on the more affordable properties entering the market. This growth in demand is a key factor behind the surge in builder stocks reaching near all-time highs. New home construction is crucial as many homeowners are hesitant to sell their homes. This situation also highlights the importance of recognizing that real estate markets cannot be generalized. The ultra-high-end existing and new home market, particularly homes priced over $10 million, is not experiencing the same level of activity due to higher interest rates and concerns about the economy. 

Despite potential negative news such as debt ceiling talks and rising interest rates, the stock market remains unfazed, largely driven by the future of AI. A deeper inspection reveals a crowded trade, with eight stocks, including Microsoft, Google, and Meta, accounting for the majority of gains this year. Excluding these eight stocks, the market performance is relatively flat or slightly positive. 

The Federal Reserve remains vigilant as the June possibility of another 0.25 basis point interest rate hike starts to gain traction, although it remains uncertain. It is worth reiterating that inflation is a challenging problem to tackle. While goods and housing inflation are easing, the unemployment rate below 4% continues to exert pressure on wages and services, making a swift return to 2% inflation unlikely. Additionally, inflation remains persistent in most developed countries, with even Japan defying expectations by recording inflation well above 3%. 

The Mortgage Maze 

Quietly, interest rates have climbed back above 3.500% on the 10-year Treasury note. The future of rates will depend on how Congress addresses the debt ceiling and the potential for further flare-ups with regional banks. One thing is certain: obtaining financing for residential and commercial properties is becoming more challenging, requiring more expertise to navigate complex loan scenarios. Moreover, there is a significant divergence in rates among lenders, as illustrated by the discrepancy of 0.5% in the loan scenario priced today, emphasizing the value of a knowledgeable broker. 

In this dynamic market environment, we remain committed to providing our clients with expert guidance and solutions to successfully navigate the ever-evolving lending landscape. 

Market Commentary 5/12/2023

Posted on by Admin

Inflation and Slowing Economy Weighs Heavy on Consumer Confidence

The results of Friday’s University of Michigan Consumer Sentiment Report (UMCSENT) were lower than expected, emphasizing the impact of inflation and a slowing economy on consumer confidence. UMCSENT holds significance as it provides insight into the current sentiment of consumers, and the reading was not favorable. As we have previously mentioned, we believe that tackling inflation is always challenging. Although we anticipate short-term interest rates are approaching their peak, interest rates are not likely to decline as rapidly as some may hope. The Federal Reserve made a critical mistake by allowing inflation to exceed 9%. As a result, they will have to exercise caution in reducing interest rates until there is clear evidence that inflation has been effectively addressed.

In terms of the Consumer Price Index (CPI), overall inflation is showing signs of abatement. Regardless, super-core inflation ( which the Fed closely monitors) remains elevated. The Fed is prepared to accept a rise in unemployment and sustain potential market repercussions to bring down inflation. This strategy hinges on the recognition that inflation disproportionately affects the most vulnerable individuals. Additionally, it is important to consider that other factors continue to exert pressure on the prices of goods and services; like the post-Covid uncertainties in global supply chains and the absence of cheap labor from China. 

Housing Supply, Consumer Sentiment, and Lending Sources

The surge in interest rates has prompted a decline in existing home sales. Borrowers looking to upsize or downsize their homes are hesitant to give up their mortgage rates of around 3% in exchange for new rates of 5% to 6% or higher. This trend has contributed to the rise in stock prices of new home builders. The housing market remains constrained, particularly in larger cities, due to limited supply.

There are concerns surrounding regional banks as deposits flee and smaller banks face  balance sheet challenges. Stronger banks are positioned to acquire weaker ones. While these mini-regional bank crises are not systemic, they are creating a tighter lending environment. Many of these banks were involved in services like commercial office space as well as provided financing options for non-institutional sponsors, construction, and other specialized loans that larger money center banks often refused. We expect to witness further episodes of bank-related issues in the coming months.

At Insignia Mortgage, we are navigating this environment proactively. Our team of professional loan brokers has identified several interesting lending options, including credit unions, boutique banks, and larger private banks that offer excellent terms for the right clients. Here are some highlights:

  • Loans up to $4MM with loan-to-values up to 80%
  • Interest-only products available for high net worth borrowers up to $20 million
  • Bank statement loan programs up to $7.5MM with rates in the low 7s
  • Financing options with as low as 5% down payment for loans up to $1.5MM and 10% down payment for loans up to $2MM
  • Foreign national loans ranging from $2MM to $30MM

We remain committed to finding innovative solutions and serving our clients with exceptional lending opportunities amidst this challenging market landscape.

Market Commentary 3/17/2023

Posted on by Damon Germanides

Thoughts On Bank Runs, Dropping Rates, And Then Some.

This past week has been quite turbulent for us all. We witnessed two major bank failures with Silicon Valley Bank and Signature Bank, along with several large regional banks, such as First Republic, suffering a massive loss of market value. Internationally, Credit Suisse faced challenges due to fears of contagion spreading to systemically important banks.

Concerns persisted throughout the week despite numerous efforts. These included government guarantees for the depositors of SVB and Signature Bank, an additional big facility to backstop US banks, the injection of $30 billion deposits by a group of large US banks into First Republic, and finally, the National Bank of Switzerland stepping in for Credit Suisse. This crisis of confidence stems from years of a zero-rate lending environment that encouraged banks to purchase longer-dated bonds and Treasuries, as well as to hold longer-dated mortgages and bank-originated loans on their balance sheets in pursuit of higher yields. As the Fed increased rates significantly, the value of these loans decreased, resulting in potential “run on the bank” risks.

It’s crucial to note that the current mark-to-market issue is different from the 2008 crisis. In 2008, the issue was with poorly underwritten mortgages that became worthless when real estate prices stopped rising. Today, banks hold more capital in reserves, which can help cushion the blow to their balance sheets. Although the situation is stressful, it’s likely that the Fed and Treasury will find a way to calm the markets in the coming days. However, there is always the tail risk of an unknown factor creating a more significant problem.

This banking debacle has implications for everyone in the real estate business, including realtors, mortgage bankers and brokers, escrow, and title companies. The decrease in confidence will likely hurt spending, delay house-hunting, and put additional pressure on sellers to lower prices. The drop in interest rates, now below the mid-5% range for most lending products, might provide some relief as banks tighten lending standards. Nonetheless, confidence has been hit hard. We suspect potential buyers to enter the market very cautiously for some time, even after equity and bond markets settle down.

The shrinking yield curve inversion has increased the probability of a recession. Historically, the unwinding of the inversion signals a higher probability of recession. The decisions of the Federal Reserve and European Central Bank regarding interest rates will further impact the global marketplace. How these institutions will balance market stabilization and inflation control remains to be seen.

Mortgage Brokers In The Current Market

Seasoned mortgage brokers are poised to play an essential role amidst the shift in the financial landscape last week. Numerous lesser-known lenders offer competitive rates, common-sense underwriting, and reasonable depository requests (at FDIC limits) as part of their portfolio product offerings. From complex full-doc loans to loans with as little as 5% down up to $1.5 million, and even stated income loans, these products are provided by regulated institutions. They are often priced better than those offered by large mortgage bankers. At Insignia Mortgage, we have experienced a significant uptick in loan requests, as borrowers seek these products without needing to transfer a substantial portion of their personal or business assets.

Market Commentary 9/30/2022

Posted on by Damon Germanides

Mortgage Rates Ease As Economy Shows Signs of Slowdown

Market pain remains the theme. There are simply too many variables to consider for anyone to know what is going to happen in the economy. The UK shocked markets this week when conflicting policy decisions by different parts of the government caused bonds to soar. In addition, the Pound plunged and pension funds cried for help as their treasury positions got smoked. Losses from the UK pensions were magnified due to leverage. Back here in the US, still the best place to invest by far, markets remain rocky. The bond market is back in charge of the direction of equities, real estate, and all other asset classes. Want to see where the world is headed? Continue to watch the 10-year Treasury for a sign. Should it move above 4.000%, there is the expectation pain for the markets will be even more exacerbated. Hopefully, it can find some footing under 3.500%- 3.750%. This would help bring the fear premium out of mortgage and other debt markets. While financing costs remain high, it does not benefit the economy for activity to crawl to a halt. As historical events like the Great Financial Crisis of 2008 and Covid 2020 have shown, it is hard to restart the economic machine once it’s stopped.

Has Inflation Reached Its Peak?    

The Fed’s favorite inflation gauge, the PCE, came in hotter than expected yet again.  However, markets shrugged off this bad news as bonds and equities early on in the trading session, but markets fell apart in the afternoon. This may be a sign that we have reached peak inflation as this report did not cause the market to panic. Our internal conversations with clients support the notion that the economy is slowing. Business owners are starting to hunker down, retail sales of luxury items are slowing (a sign that even the rich are beginning to worry),  restaurants seem much less busy and the residential and commercial real estate markets are materially slower. 

With negativity at 2008 levels across financial markets, perhaps we are nearing the end of the damage to the economy and markets. It is hard to tell, but valuations have certainly come in. A reasonable bottom in the S&P may be approaching (3,200 – 3,400). The Fed will continue to tighten, but, the pace with which they have gone so far may justify a pause or slow down to .25 -.50 bp increases over the coming year-end meetings. This column previously advocated rate hikes and was not excited about ongoing stimulus or other money giveaways, all of which are of course inflationary.  However, the Fed message is clear now, and doing too much too quickly to combat inflation may unnecessarily damage the fragile global financial system.  We think the Fed, like us, is seeing the economy weaken and confidence deteriorate to the point that inflation will subside.    

Market Commentary 9/23/2022

Posted on by Damon Germanides

Markets In Turmoil As Fed Raises Rates Yet Again

It was another brutal week for the equity and bond markets. Fed Chairman Powell reiterated his belief that pain is necessary in order to bring down inflation. The Fed raised by 75 bp and emphasized that more hikes are ahead. Chances are very high of a global recession. Bank CEOs are talking about stagflation, or a combination of slow growth, high unemployment, and rising rates. The volatile gyrations in the equity market make us wonder when something will break. Fear is high as it feels as if we are paying back all of the stimulus and easy money policies we’ve had over the last few years… With interest. 

If you listened to the talking heads, you would think there is no loan activity.  While the rapid rise in rates has slowed the pace of activity, there are still transactions happening at the right price. With the rise in interest rates, it is harder to qualify for a mortgage. This will continue to put pressure on housing prices.

Famed bond investor Jeffrey Gundlach spoke after the Fed’s meeting this Wednesday and made some good points.  He sees the S&P bottoming somewhere between 3,500 and 3,000. He is also noticing some very compelling bond opportunities. In particular, he advised that you should never time the bottom. As the market washes out, you should not sell, but look to accumulate for the long term. This same formula applies to real estate investing. Become more opportunistic while there is panic in the air. 

Market Commentary 9/16/2022

Posted on by Damon Germanides

All Eyes On Fed Next Week As Markets Remain On Edge

FedEx, one of the premier delivery companies worldwide, warned of a global recession. This is concerning news, given their intimate knowledge of the manner goods and services flow through the global economy. This warning came on the heels of ongoing fears amongst market participants about inflation, Fed tightening, and stagflation anxiety (stagflation is the combination of rising costs, higher unemployment, and slowing growth). One can look at the equity markets as a proxy for deflating asset prices worldwide. Fed Chair Powell echoed this much when he used the word “pain” on two separate occasions when discussing the Fed’s plans to bring inflation down, which is through the combination of higher rates and wealth destruction. One should remember the words “don’t fight the Fed” applies to both uptrends and downtrends.

How Deep Will The Recession Go?

A .75 bp hike on the short-term Fed Funds Rate is baked in at near 100%. However, there is a chance the Fed may go up to 100 bp in hikes. Given the slowdown in housing, the destruction of wealth in many Americans’ retirements, equity/bond holdings, and the grim outlook by business owners, our hope is that a 100 bp hike does not become a reality. Slow and steady may be a better policy. We have advocated for more and faster hikes in previous commentaries, but, the combination of Fed hikes and quantitative tightening (which is just rolling out) may succeed in bringing down inflation.  The aim at this point is to avoid a deep global recession. The comments from FedEx should not go ignored. Next week’s Fed meeting is so important, as a too-aggressive Fed could break something, which would not be good. Breaking inflation by way of an international financial crisis serves no one’s interests and would do more harm than good.  

The Lending Narrative Continues

On the lending side, higher short-term rates and even higher longer rates impede the ability of new buyers to qualify for mortgages. Home builders are trading poorly as are home improvement companies. Housing is a major component of GDP growth so there is no doubt in our minds that the U.S. is in a mild recession.  The bigger question is, how long does this last? When do interest rates top out, how will new and existing home sales and all other property types adjust to much higher interest rates? While there are lenders making practical decisions on applicants, increased mortgage payments have doubled from where they were just a few months ago. This will be a drag on housing prices, even with the limited demand in many large cities. A bit of positive news though, as potential new buyer income is holding up, and many are looking to the current volatile market as a good entry point.   

The great Warren Buffet is famous for saying he is greedy when others are fearful. Well, there is certainly fear in the air. Smart and thoughtful purchases of assets such as real estate or high-quality equities may be at the beginning phase of attractiveness. 

Market Commentary 9/2/2022

Posted on by Damon Germanides

Russia Gas Closure Spoils A Goldilocks Job Report

Equity markets were soothed earlier in the day due to an as-expected August Jobs Report. Hourly earning increases fell and more people entered the workforce. This is a sign that inflation is forcing people to accept jobs and re-think life without work.  A volatile stock market has pushed older workers back into employment, as retirement accounts have been jeopardized by the traditional 60% stock/40% bond allocation this year. And, just when you thought the equity markets were gaining some footing… Gazprom, the Russian-controlled gas company, shut down its pipeline to Europe citing an oil leak. This news was not unexpected but took equities and U.S. Treasury yields lower. The markets are in some mood. It is virtually impossible to estimate where the U.S. economy, real estate prices, and interest rates are headed. There are simply too many variables to consider and too many black swans circling

Navigating The Gazprom Effect

Taking the Fed at face value, a 50 bp hike is certain. However, one cannot rule out 75 bp, especially if oil starts surging again in response to the Gazprom news. The Baseline Fed Funds rate is gaining support for settling at around 4.00%. Inflation is starting to show signs of moderating, but it is mathematically improbable that it will fall to the Fed’s target rate of 2% in 2023.  Wall Street has had to reevaluate the higher interest rates for a longer Fed narrative as the interest rates start to do their job. Meanwhile equity and bond prices have fallen, real estate is under pressure, and business confidence remains between cautious to downright negative. The return to a more normal interest rate environment is resetting asset prices. 

I want to say a few words about the manner in which I write this weekly blog. While I am personally inclined to be a little more conservative in my thinking, I do my very best to paint a weekly picture of what I am reading. In addition to the news and other industry sources, everything shared in terms of the economy’s direction is combined with the feedback I receive from our network of clients and bank executives. Lately, the current environment is not too positive. In my opinion, we are already in a recession. That is probably going to get worse before it gets better. However, one must remember it is during times of heightened volatility and turmoil that some of the best investments present themselves. So, while I am not bullish on the economy at the moment, I do believe patience will pay off in the form of lower house prices, and better entry points for non-housing investments. 

Market Commentary 8/19/2022

Posted on by Damon Germanides

Economy and Interest Rates Present Mixed Signals

Interest rates surged late in the week with the release of the alarming UK and Germany inflation data, especially within the context of a slowing economy. Mixed economic signals in the U.S. did not help markets either with slowing GDP or rising weekly unemployment claims. Nonetheless, there were some good manufacturing reports and a better-than-expected retail sales report. Existing housing sales softened again, resulting in home builders’ confidence being dismal. Housing starts also fell. Since housing is a major component of the economy, the current housing industry status is not positive.

The Fed and The Average American Head Towards Black Swan Event

The inability of the S&P to break through the 200-day moving average is challenging the bullish narrative.  Also, Fed speak, in my opinion, shows no signs of easing. Inflation is a problem, and it must be dealt with.  Talks of 75 bp rate hikes by Fed officials as well as the start of 95 billion balance sheet run-off per month are not accommodative. These discussions also raise the possibility of a black swan type of event.  However, not dealing with inflation now results in harsh problems for the average American. When food and life’s basic essentials become unaffordable to many, the government loses creditability.  This is what concerns Fed officials the most.

Real estate activity has slowed, but every market presents opportunities. Buyers are becoming increasingly more aggressive in negotiating with sellers. The combination of higher mortgage rates and tighter lending guidelines makes qualifying for a mortgage tougher. Thankfully, niche lenders are returning to fill in the gap. Adjustable-rate mortgages and interest-only products are in demand to offset the rise in mortgage rates.

Next week’s Jackson Hole symposium will be watched closely as central bankers, economists and the Fed chairman gather to speak about the economy and fiscal and monetary policy. Stay tuned for this. 

Market Commentary 8/05/2022

Posted on by Damon Germanides

Strong Jobs Report Boosts Odds Of Fed Rate Increases

Wow! A surprisingly upended July Jobs Report added 528,000 jobs and pushed the unemployment rate down to 3.500%.  Odds of a .75 bp increase in Fed Funds spiked after the report was released and bonds sold off swiftly.  While indications like poor retail earnings reports and lower oil and commodity costs support the notion that the economy is slowing, the Jobs Report does not suggest this to be the case. This will embolden the Fed to raise rates faster and further. How this plays out will be of great debate over the coming months. For now, the equity markets took the report in stride and the Dow Index was actually up (as I write my comments).  

When it comes to the economy, traditional signs of movement now indicate uncertainty. Below are a few observations on how difficult it is to predict what the future of the economy holds.

  1. The yield curve is inverted, quite possibly the most reliable indication that the economy may be in a recession, yet junk bond yields have not blown out.
  2. Wages are not keeping up with inflation, but consumers continue to spend, and defaults on credit card and auto loans remain low.
  3. Housing has slowed as interest rates have risen but supply still remains below demand for now and prices have only fallen mildly in Southern California (Insignia Mortgage lends in CA).
  4. The equity market has ripped higher even as revenue and earnings show signs of deterioration
  5. Many other developed nations are hiking rates as well, and the UK not only hiked but stated with conviction a recession is imminent.

Jobs Report And Mortgages

The Jobs report is not helpful in interpreting the mortgage market, as mortgage rates soared after the report’s release. It may be wise to listen to the “Fed Speak” which has a unified opinion that expecting interest rates to fall by sometime next year is wishful thinking. Inflation remains the primary worry for the Fed as the longer high rates of inflation stick around, the more embedded into the economy it becomes. As housing inventory picks up, buyers will resurge as prices adjust to a more restrictive lending and interest rate environment. One positive this week is the re-emergence of some non-QM lenders, who really help the self-employed borrower or unique borrower scenario (as these types of loans do not have to fix into a specific underwriting box). More on this in the weeks to come.

Some other things to consider…Should bond traders change their tune on the state of the economy, interest rates could move up quickly. It is also important to note that Fed balance sheet reduction goes into overdrive in September, with 95 billion per month of run-off.

 

 

 

Market Commentary 7/29/2022

Posted on by Damon Germanides

Bonds Rally As Recession Worries Intensify

The U.S. equity markets proved resilient taking on both a .75 bp Fed rate hike and a GDP print confirming that the economy is technically in a recession. Two negative quarters of real GDP growth support this status. Inflation continues to be a problem but has likely peaked with the Personal Consumption Expenditure (PCE) coming in at a multi-decade high, but flattening out on month-over-month readings. Now, the great unknown is the pace at which inflation moves off its highs. The Fed’s goal of 2% inflation seems almost fanciful near term. The truth is inflation will be with us for quite some time.  

For Better Or For Worse?

Parts of the yield curve have been inverted. An inverted yield curve remains one of the best indications that the economy is in poor shape and financial conditions have perhaps tightened too much. One must not discount the threat of stagflation, should inflation become embedded in the prices of goods and services even as the economy slows. The equity market is forward-thinking, so even with sagging consumer and business confidence amidst a host of other negatives, the market found a way to rally. Perhaps the worst is behind the markets. Or perhaps, it is a bear market rally. Only time will tell. It is important to remember Fed rate hikes need some time to work through the system. Also, come September, the Fed will be selling close to 95 billion in bonds as part of its QT plan. It will be an interesting third and fourth quarter. 

Troubles abroad cannot be dismissed either. Whether it’s the Russia-Ukraine War, European or Chinese economic slowdown (worse than what the U.S. is currently experiencing at the moment), geo-political tension, or global run-away inflation, the world continues to experience great economic stress kickstarted by the pandemic. Joblessness on a global scale will likely increase as many large businesses are cutting back on hiring. If the goal of the Fed is to break inflation, one unfortunate truth is that job casualties will be unavoidable.

As expected, home prices are starting to fall in response to higher interest rates and stricter bank underwriting. To their benefit, buyers have found themselves more optionality and a selling environment where they have a seat at the negotiating table. Mortgage rates have come down lightly as 30-year fixed rate money note rates can be found at 4.75% or below.  No doubt a big move from the sub 3% range, this same product was being offered at a short while ago but removed enough from the high of 6% plus not too long ago. The move lower in mortgage rates should help some buyers make offers on homes.  Adjustable rate mortgages follow the 10-year U.S. Treasury. As the 10-year Treasury moves lower so do ARM rates. This may take some time as lenders are being cautious given the current headwinds. This should be a boon for the high-end market, especially if sub 4% interest-only mortgages are offered again.