Tag: inflation

Market Commentary 4/21/2023

damon Damon Germanides
April 21, 2023

Mortgage Rates Hold Steady

Markets were calm this week as initial worries over bank earnings and balance sheets were better than anticipated. Bank of America’s CEO, Brian Moynihan, provided comfort to the market with his commentary on the consumer, the state of the banks, and his explanation of why money is moving out of the banking system to higher-yielding and safe instruments such as Treasuries. In short, the outflow of money from banks is what the Fed wants to see. In our highly leveraged economy, money flowing from the banking system will tighten the amount of available credit and require banks to offer more yield to keep depositors. This keeps interest rates on mortgages elevated. As a result, there is less money in the economy, which should slow demand and help cool off inflation. It sounds simple, but the twist comes with timing. Fed policy works with long and variable lags, so any policy initiated many months ago may only now be impacting the economy. That is why many are calling for a pause to rate hikes to see what may come from the jumbo move in short-term rates over the last year. However, betting markets believe the Fed will raise rates another .25 basis points in May as Fed officials continue to advocate for further tightening in its inflation fight. With service inflation remaining sticky and business activity picking up, we too believe the Fed will go for one more hike.

Nevertheless, there are many mixed signals that suggest the economy is cooling. Auto sales and housing have certainly slowed (yet builder stocks are near all-time highs, go figure). While loan defaults across commercial, auto, and consumer credit remain low, default rates are rising, as are spreads. The MOVE index, a measure of bond volatility, is very high, which is never a good sign. Weekly jobless claims point to more layoffs ahead. Let’s not lose sight that a strong sign of a looming recession remains with the inverted yield curve. In addition, banks are limiting the lending box in anticipation of a slowing economy, lack of deposit growth, and in response to the SVB and Signature Bank failures.

Smaller Lenders Are Better

As big banks tighten the lending box on residential mortgages, Insignia Mortgage is locating eager to lend sources like smaller banks and credit unions.  We recently partnered with a local, federally-insured institution, with an old-fashioned way of doing business. This lender looks at each scenario case by case and then makes a decision. Interest rates are in the low 5’s for a 5/1 ARM, and this particular lender will offer a loan amount of up to $4 million dollars at 80% of appraised value. No banking relationship is required. We like these lenders because they are community-oriented and far easier to deal with than the bigger banks. Their interests are aligned with ours and most especially, our clients. Every deal matters to these smaller lenders fighting for market share against the bigger banks.

Market Commentary 4/14/2023

damon Damon Germanides
April 14, 2023

Fall In Mortgage Rates Welcomed During Spring Home Buying Season 

Markets were generally upbeat this week as several key inflation readings trended lower. Nonetheless, we recommend paying close attention to service inflation. It is proving to be sticky and is the measure being closely monitored by the Fed. Services make up the bulk of business expenses, and the Fed is keen to see this metric fall to a range of 2% to 3% from around 5% per annum. Of additional concern is the rise in oil prices as OPEC cuts production and oil settles above $80 per barrel. The betting markets are over 60% that the Fed will raise short-term rates by another .25 basis points before pausing. Although our feelings are in line with the betting markets on the one-and-done on the Fed rate hikes, they differ from the consensus view that the Fed will pivot by late summer to lower short-term interest rates. Our thinking is that the inflation dragon needs to be slain. Ensuring that inflation is put back in the box will require the Fed to keep interest rates higher for longer. With financial conditions easing again along with the recent rally in the equity and bond markets, the Fed can justify another rate hike. They can do so veiled as an attempt to increase short-term interest rates above the average inflation to the so-called restrictive territory. 

JP Morgan reported earnings this morning and the bank had a very good quarter. Comments from the CEO, Jamie Dimon, soothed markets on the overall state of the economy and the resiliency of the banking sector. For the moment, while the economy is slowing, it is still doing better than feared. The banking crisis seems to have abated, and inflation is coming down slowly. Even so, one must listen to the great Warren Buffet, who is not so sure the banking crisis is over. Dissenting views are just part of what makes this market so tough to dissect. After 30 years of low-interest rates, the move to a higher neutral interest rate is affecting the economy on many levels. It is stressing banks, hitting valuations on apartments and office buildings, and making it much harder for consumers and businesses to qualify for loans. Persistent inflation is impacting consumer spending. The reworking of global supply chains is putting a floor on input costs as the world moves from just-in-time inventory to certainty of inventory in a post-COVID world. All of this and more is what makes the Fed’s job so difficult and why handicapping the direction of interest rates and the economy is a fool’s errand. 

Humanizing the Loan Process

Mortgage applicants have adjusted to the higher rate environment. Higher interest rates mean a lower mortgage for many, so the pre-approval process is crucial. There are lenders out there that will think outside the box and are helping borrowers maximize their loan dollar amounts. Liquid asset depletion, relying more on a recent profit and loss statement, RSU income, to name a few, can add more income to a borrower looking to qualify for a home mortgage. This type of common-sense underwriting is more prevalent with smaller banks and credit unions that look to humanize the loan underwriting process, offer competitive interest rates, and genuinely desire to help borrowers in their community. 

Market Commentary 4/7/2023

damon Damon Germanides
April 7, 2023

Fed Maintains Rate Hike Path Due To Jobs Report 


An in-line Jobs Report will keep the Federal Reserve on hold until its next meeting in May. As a result, market forecasters predict there will be another .25 bp rate hike to 60%. Wage inflation continues to normalize, which is a welcome sign, while job growth in the private sector has slowed. The unemployment rate fell to 3.500%, which suggests the job market is still too tight, especially with the approximately 10 million jobs left unfulfilled. Viewing the economy based on the jobs picture, the economy is proving to be much more resilient than many had thought. This is despite the almost 500 basis points tightening in such a short period.  

Yet, there are other economic metrics flashing warning signs. This includes a crucial aspect, the de-inverting yield curve. Also, of concern is the senior loan officer survey which confirms our day-to-day view that bank underwriting is tightening up. There has been an increase in consumer debt and an uptick in auto loan defaults. In addition, keep in mind the recent bank failures. They have not only passed the panic phase but will also continue to impact bank underwriting of risk. This remains a very confusing market and we certainly do not have a crystal ball. Nonetheless, the risk of a recession or of a recession already in its early phase remains high. Oil moving up over 80 per barrel does not help those with brighter expectations. 

Some of you are wondering why mortgage rates continue to remain elevated despite the 10-year Treasury falling to around 3.35%. There are several reasons for this, but the most promising is the average spread of Bank Rates for 30-year mortgages moving to nearly 3.33% over the 10-year Treasury. Should that spread tighten to the low of 1.35%, 30-year mortgage rates would be closer to 4.75% -5% rather than the 6.00% to 7.00% many banks are offering. The demand by investors for a bigger spread on mortgage loans is very much affecting the ability of potential borrowers to qualify for home mortgages. This is also why Insignia Mortgage spends a considerable amount of time meeting with various smaller to mid-sized banks who are willing to sharpen their pencil on loan terms, as opposed to seeking large banking relationships on larger jumbo loans. The goal is to partner with a resource that offers commonsense decisions on loan approvals. It is precisely this optionality that makes the mortgage broker model so important in today’s particularly challenging marketplace. 

Market Commentary 3/17/2023

damon Damon Germanides
March 17, 2023

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 3/10/2023

damon Damon Germanides
March 10, 2023

Treasury Yields Drop As Regional Banks Show Signs of Stress

Treasury yields dropped precipitously on Friday, but for all the wrong reasons. Several California-based regional banks experienced a sharp drop in equity values as customers withdrew money out of fear the banks may become insolvent.  Silicon Valley Bank (SV) was seized as it was forced to liquidate its bond portfolio due to a negative interest rate margin. In basic terms, this means the bank was paying more to depositors than to borrowers. Fear bled over to the First Republic and the Signature Bank as those stocks were down heavily. These episodes are the result of a decades-long easy money cycle that forced banks to buy long-dated bonds as well as lend money at near-zero interest rates. Additional uneasiness surrounds the fact that there’s never just one cockroach in the room – that these banks, unlike the banks of the 2008 Financial Crisis, are heavily regulated. As a result, they were supposed to have ample capital in reserves to protect against stressful scenarios. In the case of SVB, it still failed. Of further concern is the fact that SVB has been the bank to the most coveted part of the economy for the last 10 years. Their technology and their management team were presumed to be world-class. Yesterday I was telling a friend that the last two days were reminiscent of the Bear Sterns collapse. History does not repeat yet it often rhymes.  However, to keep this all in perspective, the big money center banks, or more bluntly, the banks that really matter from a systemic standpoint, maintain abundant capital reserves. So, while the SVB collapse is worrisome, I do not believe we are reliving 2008 all over again.

The Jobs Report came in a bit above expectation and wages grew slower. This takes the .50 basis point hike off the table (especially after today’s negative events in the banking sector). The Fed will most likely go .25 basis point at its next two to three meetings as inflation remains a problem but could change quickly. We assume the Fed funds rate to top off at 5.75% to 6.00% before turning the other way. There is a sense of apprehension in the air now and I think consumers, risk-takers, and business owners will continue to hunker down. Perhaps, the Fed’s work of raising rates to slow the economy and encourage a more cautious spending public is now at play.   Higher interest rates have already slowed real estate activity by making mortgages unattractive. They’ve also lowered commercial real estate values and are hitting equities now in a meaningful way. The pain of a slowing economy is beginning to take hold. 

What are we to do?  Business, real estate, and life have cycles.  Real estate is in an adjustment phase and prices (as we have reiterated) will need to adjust to the new era of higher interest rates. Anecdotally, many brokers I speak to realize that price reductions will lead to buyers returning to the table.  While not great news for sellers, this is the reality of a free marketplace.  The good news is the Fed is nearer to the end of the rate hike cycle than the beginning. Once there is consensus on a rate ceiling, the uncertainty of higher interest rates will dissipate, and activity will resume.  However, waiting for that time will not be without some additional distress, I am afraid.

Market Commentary 3/3/2023

damon Damon Germanides
March 3, 2023

Strong Jobs Data and Inflation Increase Burden On Fed

After a grueling week of higher interest rates, some of Thursday’s Fed speak soothed the markets. As we have previously mentioned, we are not huge fans of the ceaseless opining that has become the norm from the Fed. We are often confused by Fed comments which tend to require clarification later on. 

We would prefer to focus on the data. Employment remains tight, as evidenced by weekly unemployment statistics and a very strong January Jobs Report. Although we are seeing many large corporate layoffs along with signs of a slowing economy, the unemployment data suggests the economy is much more resilient than many experts assumed. Inflation is also proving to be stickier. While some inflation will certainly be transitory, wage inflation and service inflation are less likely to fall. As the 10-year Treasury surged above 4.000% this week, bond traders are more accepting of the idea that persistent inflation could drive interest rates higher and make qualifying for a mortgage more difficult.

Higher interest and widening spreads are starting to negatively affect the commercial real estate markets, especially office spaces.  Lenders are becoming more selective in their loan decision-making process. We expect to see more and more defaults within the commercial space as the era of easy money comes to an end.  In the single-family home sector, activity on the eve of the busy spring buying season is showing signs of life. Nonetheless, volume is a far cry from the frantic pace of recent years.  Qualifying for a home remains challenging but we are seeing buyers change their expectations based on affordability. We assume that price adjustments will be required to close the gap between buyer and seller.

The deeply inverted yield curve is troubling to us and should be taken as a serious precursor to a recession. No one knows what type of black swan event is circling until it happens, but a sharp drop in interest rates amidst the realization the economy has stalled is one possible outcome in the coming months. Also, a slow grinding economy with fits and starts remains another possibility in what is being called a soft-landing outcome. The present moment can only be described as unusual. The economy seems to be slowing, but inflation remains high. Housing activity is at a multi-decade low, but wages continue to go up as employment remains tight. Only in time, will we know the true impacts of Fed policy.            

Market Commentary 2.24.2023

damon Damon Germanides
February 24, 2023

Markets Rethink Inflation Amidst Fed Pivot

The quote “this too shall pass” may be apropos for the strain of higher inflation, higher interest rates, and increased volatility is having on all of us. For the mortgage market, it is an arm-wrestling match with interest rates, each day, in real-time. 

Unfortunately, our instinct has been that once inflation is left to run hot for longer, it infects all aspects of the economy and does not retreat quickly.  We opined recently that we were concerned Fed Chairman Powell’s press conference in early February was way too optimistic about the pace of cooling inflation. Also odd was the Fed’s belief that financial conditions were nearing a neutral level of tightening while most economists were seeing financial conditions ease up again.  All of this has now come home to roost with CPI, PPI, January jobs report, and PCE, all of which came in hotter than expected. It is now widely believed that the Fed will need to raise interest rates further while also holding rates higher for longer to ensure inflation is wrung out of the system.

Financial Reality: Recession, Rates, & The Grind

Regardless of the popular belief that rates will continue to rise for a longer period, we suspect that the economy may be in a recession. As a result, the higher cost of living is impacting spending, which may come through in the data sooner than later. Mortgage rates are certainly making it harder for borrowers to qualify for home loans as well as purchase or refinance commercial properties. Bank liquidity remains tight, credit card balances are soaring, and high-risk auto loans are rolling over. All are signs that the consumer is under pressure. The lagging effects of monetary policy take time and the thinking is that the jumbo rate hikes from last year take about 9 months to work their way into the system. Should the economy fall into an official recession, the Fed will be forced to lower rates. At what point the Fed rate hikes break something is unknown, but we are no longer in a low-interest rate market as interest has returned to a normal level. 

Our motto is that you must live in the world you are in, and not the one you want. Applying this to real estate means working much harder for much less, and seeing deals come and go. Again, we are of the firm belief that many prospective buyers are actively looking for a discount on the price to overcome the big increase in monthly mortgage payments. We are starting to see signs of more favorable negotiations between buyers and sellers, which is encouraging. For the deals that big banks refuse to fund, local banks are doing whatever they can to make common sense decisions on successfully closing such deals. The reinstatement of a busy market will take time. For now, it remains a grind. 

Market Commentary 1/13/2023

damon Damon Germanides
January 13, 2023

Interest Rates Drop As Markets Look Beyond Fed Hikes

First, the good news. Inflation is falling and it appears that the Fed is near the end of its tightening cycle. Odds are that the Fed will raise .25 bp in February and again in March before stopping. While inflation is still excessively high, shipping costs have dropped back to pre-pandemic levels, used autos prices have fallen, and other goods have followed suit. Gasoline prices are lower and the supply chain is functioning much more efficiently. The job market remains tight and that is still of some concern for the Fed. However, the pace of wage increases is lessening. Bond yields and mortgage rates have also lowered as the 10-year Treasury is now around 3.44%.  This has helped bring potential home buyers back into the market. 

Now, the not-so-good news. Negative ISM readings, surging credit card debt, an inverted yield curve, and warnings from CEOs such as Jamie Dimon on the state of the economy have all of us on “recession watch.” Generally, it is hard to bet against the U.S. consumer and business owner. Nonetheless, there are signs that consumers are tapping into credit cards more often to pay for life necessities, and business owners are cutting back on staff and hours of work per week. How this plays out over the next couple of months will be an important sign of where the economy is headed.

The hope remains the Fed will thread the needle and the economy may experience a very mild recession. The strong jobs market supports the no-recession argument, while other economic indicators suggest otherwise. The effects of the Fed’s jumbo rate hikes and quantitative tightening have yet to be discerned, as the monetary policy takes some time to work into the system. Lending standards at banks continue to tighten. The overall rise in short-term rates will affect consumers and business owners this year, as debt service costs increase quite dramatically for debtors who either have a floating rate debt or debt coming due.

Home builders reported soft sales volume. While many builders are offering incentives to lure buyers, builders are holding back on price cuts. Housing valuations have held up well and better than some expected. Why? The combination of a low fixed-rate mortgage, a 10-year + period of strict loan underwriting, and a big move-up in home values is keeping pressure on sellers to cut deals. Should the economy move into a recession later in the year, sellers will be more willing to negotiate or list their property for sale as their finances become strained. For the moment, although the housing markets are slow, the drop in interest rates has got buyers looking again. Given that home affordability is stretched, lower rates are needed to jump-start real estate activity. While interest rates are not likely to move to pandemic levels, our experience is that should mortgage rates settle in under 5.000%, borrowers will respond positively. 

Market Commentary 12/16/2022

damon Damon Germanides
December 16, 2022

Recession Fears Escalate As Fed Holds Firm On Rate Hikes 

As anticipated, The Fed raised short-term interest rates by .50 bp on Wednesday. The initial market reaction was neutral, but sentiments changed once the markets digested the Fed’s resolve to fight inflation on Thursday. Additionally, the Fed emphasized its projection that short-term interest rates may go higher than expected due to the very tight labor market. The markets are concerned because the economy seems to be weakening. Major corporations have announced job cuts, credit card balances have risen, and U.S. retail and manufacturing spending has slowed. Market experts are attempting to reconcile how far the Fed is willing to see real estate and equity markets decline, rather than not do enough to squash inflation. The most vulnerable parts of society are hurt by inflation the most. Powell has referenced the need for “pain”(financial pain or the decline in asset prices) several times over the last many months as the unfortunate result of taming inflation.

Across the pond, European central bankers were also very hawkish about where interest rates will need to go to quell inflation. U.S. Treasury yields remain very volatile as expectations of tighter financial conditions loom. Speaking of bonds, the inverted yield curve is an excellent indicator of recession probability. How steeply the yield curve dips signifies to the bond market that a recession is likely.  However, a counterargument can be made for higher interest rates as liquidity is taken out of the system.  It seems logical investors will demand more yield for each unit of risk. Interest rates along the yield curve should move up. Also, onshoring of industrial production and pivoting from just-in-time inventory to certainty-of-inventory, employee demands for higher wages, as well as a low level of “total employed” are inflationary. In the end, the best financial advice this year has been to “not fight the Fed.”  The Fed wants positive real rates across the whole yield curve and fighting the Fed is usually not wise.  While no one can predict the future, we are in the midst of a paradigm shift in interest rates. The results of this shift will be felt in the coming year.

Interest rates have dipped slightly, and that has led to a small increase in activity. Winter has always been a historically slow time of year, but the jumbo hikes the Fed has undertaken have certainly slowed the market. With inflation coming down, the hope is interest rates will normalize and thereby help the real estate market. As 2023 approaches, lenders will have new funding targets, which should help as banks compete for new business. 

Market Commentary 12/2/2022

damon Damon Germanides
December 2, 2022

Market Left In Speculation Re: Fed’s Next Move Amidst Stronger Than Expected Jobs Report

It was a very good week for stocks and bonds. Over the last couple of weeks, interest rates have been drifting lower (under 6%), bringing more borrowers to our local real estate markets. However, the better-than-expected jobs report will keep pressure on the Fed to continue its path of higher interest rates. Let me be clear, the rate of increase in interest rate will moderate. But for those who think interest rates are coming right back down, this Jobs Report should put those thoughts to rest in the near term. The reason is that wage growth remains strong and well above previous forecasts. Since employee wages make up for most companies’ largest expense, wage growth places great pressure on businesses to continue raising prices. While the Fed would like to see wage growth in the 2% to 3% range, today’s number of 5.60% was too high. Inflation can only come down so much with wages growing at this clip.  Additionally, with unemployment still under 4.00%, we anticipate another 50 bp increase in the Fed Funds rate when the committee meets later in the month.   

Some good news on the mortgage front.  Fannie/Freddie has now opened up their home loans to over $1 million in high-cost areas. This will help those borrowers looking to purchase in markets that may not have the perfect profile for a balance sheet lender. Fannie/Freddie tends to be less restrictive on post-closing reserves and credit at higher loan-to-values.  Also, as lenders adjust to the higher interest rates, we are beginning to see credit officers at local banks and credit unions approve exceptions with more regularity. A good sign for sure.