Market Commentary 10/13/2023

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 2/25/22

Russian Invasion Slows Pace Of Fed Tightening Plan

The Russian invasion into Ukraine sent global markets on a wild ride with globally traded public securities, bonds, commodities, and crypto trading.  Wednesday evening was a sad day as I witnessed the first invasion of Europe in my lifetime.  The last few years have certainly been challenging for everyone due to the pandemic. The destabilization of a European country will continue to create additional known and unknown risks throughout the world at a very delicate time. While our economy is doing well overall, it is also slowing as inflation inhibits consumer spending ability. The Russian invasion of Ukraine will add more pressure to food and oil prices. While we hope sanctions move Putin to negotiate, he is simply unpredictable.    

The U.S. being the safe haven in the world witnessed a quick drawdown on equities this Thursday morning, which turned into “a rip your face off” type of rally. The old trader’s adage of “buy on the sound of cannons” certainly played out.  Bond yields sank but then reversed higher and gold and silver traded down as well, which I found to be curious.  The reason bonds yields rose is due to unprecedented global inflation.  Ultimately, the bond markets quickly overcame their concern about what Putin may do to Ukraine and beyond.  Personally, I believe we have yet to see the worst of Putin’s intentions. There could be very troubling days ahead in the market.  Make no mistake, China is watching all of this very closely, as its own ambitions to take control of Taiwan cannot be forgotten. Additionally, the relationship between Russia and China has been growing more established over the last few years.

As the world has become more dangerous overnight, real estate should benefit as a less volatile asset to own.  Good solid real estate holding at a reasonable price will continue to be sought after.  Also, as many investors have had a great run in the equity portfolios, I am hearing anecdotally from several financial advisors that those investors with big gains are looking to cash out their winnings for either a new home or a cash flow producing property. 

The demand for U.S. bonds during more unstable periods should keep a lid on high bonds as yields may go. However, as inflation is running at the hottest rate in over 40 years, rates will need to rise (but probably not as much prior to the conflict).  This will be good for tech stocks who were very worried about the 10 year Treasury quickly moving north of 2.500%. While rates can move higher over time, the pace will be more gradual now.  Borrowers should take note that there is still time to lock in favorable interest rates. This opportunity could quickly change if there is a pullback by Russia over Ukraine. For the moment, this seems unlikely, but still cannot be totally discounted.