Market Commentary 12/3/21

Bond Yields Drop As Markets Cope With New Omicron Variant

Market volatility is back in a big way. While obvious for those monitoring the stock market, the major moves in the bond market are less discussed. The 10 year Treasury dropped from a high of near 1.70% and is now trading under 1.400%. These enormous 2+ standard deviation type moves in the bond market are not seen very often. The U.S. economy remains strong amidst the initial market worries over the Omicron variant. Beyond the obvious, why are the markets trading like this?  Our guess is that it’s a combination of a fully priced market, year-end tax selling, and concerns over too many dollars chasing too few goods. All of these factors contribute to substantial inflation pressures and international supply chain disruption. The Fed also came out this week and stated that inflation can no longer be viewed as transitory- that it is more structural in nature. 

The November Jobs number was a disappointment overall. While the unemployment rate dropped from 4.500% to 4.20% and the labor force participation rate improved, job creation has slowed for the moment. How the variant will affect future job prints is hard to say, although early commentary from experts suggests this new variant is not as virulent. There are many job openings and not enough demand from prospective employees to fill these jobs. It is unclear as to why those jobs are not being filled. Behavioral changes as a result of the pandemic are certainly one reason.  Income gains have continued, but with high inflation readings, those gains are being offset by higher food, energy, and housing expenses. The fact that it’s cheaper to stay at home than to pay for child care, a second car, the need to commute for work, etc., may also be keeping some from re-entering the workplace as it is.

In some markets, housing is slowing as high prices discourage average Americans from being in a position to buy homes. The mortgage market has transitioned to niche lending products in a big way as many traditional buyers and refinance applicants have taken advantage of the almost 2-year ultra-low interest rate environment.  Now, those borrowers with difficult-to-understand financials are dominating purchase money and refinance requests. Due to competition, these products are attractively priced. While terms are not as good as big money center banks, the terms are compelling for those who fall into the category of either being self-employed, a foreign national, or a real estate investor. Programs for no-income verification are also making a comeback in a big way. 

Desk chair in the light - October 8 2021 blog image

Market Commentary 10/8/21

Today’s poor jobs report was a surprise as Covid cases have been declining for the last few weeks. There is a strange dichotomy that has developed in the U.S. labor market. There are over 11 million job openings, yet there has been a continuous decline in the working population. The Labor Force Participation Rate (LFPR) fell to 61.6% as 183,000 people left the labor force. Businesses across the county are offering higher starting salaries and cash perks to attract workers. Higher up the pay scale, policies such as work from home and flexible work schedules with higher wages seem to favor the employee, yet all types of businesses are struggling to fill open positions. 

The combination of wage inflation and goods inflation remains top of mind for many economists, along with the fear of a slowing economy and rising costs. With major supply chain disruptions, as well as a lack of workers, the busy fall buying season is shaping up to be one for the ages. Cargo ships at the Port of Los Angeles and Long Beach are backed up for weeks. Dry shipping costs are outrageously expensive. Companies that can pass on the rise in the costs of goods and labor will do so. The big concern is that even with rising wage inflation if the prices of goods go up more than the increase in wages it is still a net loss for lower-paid workers. The massive disruption by Covid will take many months to work itself out and the cost to the consumer is higher prices. 

Support for the transitory argument on inflation by the Fed is beginning to wane as the 10-year U.S. Treasury bond is trading above 1.60%. For the moment, the equity market is agnostic to this move higher in bond yields, but should this trend continue, volatility will pick up, especially with high-beta long-duration technology stocks. Rising rates may also cool the red-hot housing market. Even with the rise in housing prices in the last 18 months, ultra-low interest rates have kept payments reasonable and therefore have offset the expensive housing market. With a high probability that the Fed will need to begin tapering its bond purchases by the end of this year, rates could move up meaningfully. Absent Fed QE, time will tell what the market will require for bond and mortgage yields to catch a bid and how other markets will be affected if interest rates drift higher.

05_07_2021_blog

Market Commentary 5/7/21

Interest Rates Tick Higher As April Jobs Report Disappoints

A surprisingly horrible April jobs report sent bond yields down and lifted stocks higher in early morning trading. This report caught many of us off-guard given that the economy is on fire and many businesses are starting to see a return to normal. It is unclear if this was just a one-off poor jobs report, especially given the strong numbers out of payroll giant ADP regarding the jobs recovery earlier in the week. However, some experts, including folks in the Commerce Department, are asking the powers that be to re-think the extended Covid unemployment benefits. This comes on the heels of many customer-facing businesses complaining that they are finding it hard to entice new workers, even after raising wages and offering other incentives.  

Asset inflation has been seen for quite some time, as has commodity inflation. There is no doubt that goods and services are becoming more expensive, regardless of what official data states. Consumers don’t need to look past the cost of food, gas, or housing to see that for themselves. Business owners can plainly see inflation in their cost of operations. Many businesses with competitive advantages are raising prices. CEOs of major enterprises are seeing inflation pressures that have not been felt in many years. The big question is: when does inflation become a big enough problem to cause the Fed to react. For the moment, the bunk April’s jobs report has given the Fed cover to remain ultra-dovish for longer, especially as the unemployment rate rose to 6.1%.

As the market digests this counterintuitive jobs report, real estate borrowers may have another window to look to lock in extremely accommodative long-term interest rates. Insignia Mortgage has been advocating for months to take advantage of the Fed’s desire to keep interest rates low for longer before the window closes. The pandemic will end eventually and with incredibly robust economic growth at some point, the Fed will need to taper its bond-buying and artificially suppressed normal level of interest rates. However, it looks as if this jobs report will prop open the window a bit longer.

07_03_2020_blog

Market Commentary 7/2/20

A strong June jobs report pushed equities higher on a shortened trading week. While the economy is still so fragile, back-to-back better-than-expected jobs reports support the premise that quite possibly the worst is behind us on Covid-19. However, new cases have been spiking which is worrisome. The next few weeks will be key as fresh data is released on infection rates, hospitalizations, and deaths. 

If you think of the stock market as a voting machine, the rally higher in stocks and less volatility in the bond market is telling us things are really improving. Yet many customer-facing businesses (retail, restaurants, services) are struggling. Meanwhile, the tech sector rallies based on the explosive growth of services that affect the new normal in the work-from-home economy. How these tech services help or the nearly 20 million unemployed find new opportunities is not yet clear, but never underestimate U.S. innovation and resilience. Pfizer released some very promising Covid-19 vaccination data. It is still early but should a treatment(s) become a reality, all markets (stocks and bonds) would breathe a sigh of relief and economic productivity would surge. 

With the jobs picture improving, the new and resale housing market has improved as well. Supply remains a big issue, especially in tight markets like California. Interest rates are very attractive and the need for more space at home supports a stable housing market and perhaps even one that moves higher in price in certain pockets.  

Local banks and credit unions appear to be picking up the loans the large money center banks simply don’t want to deal with or lack the capacity to close on time. Insignia Mortgage continues to close purchase loans on time and with very attractive rates and terms. Cash-outs without restrictions, interest-only loans, and investment property loans are all readily available through our lending sources. 

05_08_2020_blog

Market Commentary 5/8/20

The April jobs report was the worst on record with over 20 million of the U.S. workforce currently unemployed. Our hearts go out to each and every person who has lost their job as a result of Covid-19. However, the U.S. equities market is trading up today, so we ask ourselves, “what gives?” Perhaps the market is telling us the worst is behind us. We sure hope so, but we still believe there will be a tough road ahead as our governors and mayors slowly begin to re-open up the economy.

Interest rates remain pegged near zero on U.S. T-Bills and the 10-year U.S. Treasury bond has traded within a tight range over the last couple of weeks as volatility has subsided. However, mortgage rates have untethered from the U.S. Treasury rates as banks have raised interest rates and tightened guidelines, understandably. We expect mortgage rates to trade better if and when the U.S. economy can re-open without significant spikes in Covid-19 infections. 

Commercial lending, including multi-family, so far has been hit the hardest due to so many tenants or renters unable to pay their rent. Despite this, we are starting to see some relief as lenders slowly re-enter the market. Expect several months of payment reserves as part of the loan request, also known as an interest reserve, and reduced loan-to-values and risk-based pricing.

On the residential lending front, there has been no better time in my career to be a mortgage broker. Insignia Mortgage’s many long-term relationships are paying off as we are customizing loans for our clients day in and day out. Our suite of lenders all have different risk appetites, so having optionality and pricing power with different lenders has resulted in our ability to place loans that other large money center banks have declined. 

We continue to offer the loans for the following scenarios with very fair rates and terms:

  • Interest-only purchase loans, refinances, and cash-out loans for primary residences, second homes, and investment properties.
  • Non-occupant co-borrowers.
  • Foreign national loans.
  • Cross-collateralized loans and Asset consumption loans.
  • 1031 exchanges and loan structure with LLC, LP, or corporation as borrowers.
05_01_2020_blog

Market Commentary 5/1/20

Economic pain caused by Covid-19 deepened this week as the unemployment numbers hit 30 million people. Expect next week’s April jobs report to hit 20%. With consumer spending down, and so many people out of work, it was no surprise that Q1 2020 GDP contracted by – 4.80% and will likely be followed up by a much larger drop in Q2 2020. The Fed and the federal government are implementing a “by any means necessary” approach, which is echoed by the European and Japanese central banks and governments as well. These trends continue to backstop our economy. It’s hoped that the approach will boost economic recovery once the U.S. economy is turned on again, as well as support asset prices. We sure hope this is the case but are also aware that consumer and business behavior has changed due to the pandemic and the recovery could take much longer than anticipated. 

Regarding housing and lending, Covid-19 hit the spring buying season hard. However, interest rates remain low and may drop further over time, enticing more buyers into the market. There are also signs that the non-QM market is slowly reviving, which is a positive sign, especially for cities such as Los Angeles which have many self-employed borrowers. Big banks continue to pull back from the marketplace. Our office has received an unprecedented number of requests for financing the past few weeks as borrowers look for alternative financing options. We are happy to report that for the most part, our partner lenders remain committed to pulling out all the stops to help borrowers refinance or purchase homes. In our opinion, there has never been a better time to be a broker with long-term lending relationships and that is proving to be a great benefit for our clients during this very difficult time.

04_03_2020_blog

Market Commentary 4/3/20

COVID-19 continues to be the focus as the entire world fights this disease and many countries hit pause on their economies to help tame the spread of the virus.

The U.S. saw the highest weekly jobless claims on record on Thursday as well as a downright awful March employment report. While the numbers were horrible, it was not unexpected. As we have opined previously, economic data is meaningless when the economy is on hold. What is important is COVID-19 testing, infection rates, and government assistance programs. We need testing to determine who is sick or has built an immunity to the disease so they may stay isolated or go back to work, and we need assistance to keep businesses from laying off staff or closing down so that once the virus passes, the economic engine can begin to churn.

The state of the residential mortgage market has tightened, as expected. However, our suite of lenders are still active and are offering common-sense underwriting. Most lenders are now offering drive-by appraisals as a safety-first response to the virus. Mortgage rates have decoupled from U.S. Treasury rates as banks are pricing mortgages higher in response to the volume surge and uncertainty of the moment (same with the commercial market). Liquid reserves are key and are being weighed more heavily on jumbo mortgages than income analysis. Interest-only loans and cash-out refinances are still available but at reduced loan-to-values. Overall, our lenders want to continue to help clients through this difficult time with a slightly more cautious approach when underwriting larger loan requests. 

02_07_2020_blog

Market Commentary 2/7/20

A strong January jobs report reinforced the strength of the domestic economy. However, after a 4-day surge by equities earlier in the week, stocks sold off Friday and bond yields pushed lower. On Friday, bonds took comfort from muted wage inflation and U.S. equities sold off as a response to renewed fears of a coronavirus pandemic still low, but hard to handicap. Equities rallied earlier in the week in response to stronger than expected manufacturing and service sector reports. 

The January jobs report was impressive with 225,000 jobs created versus 164,000 expected. The unemployment rate ticked up to 3.6%, but for good reason, as more people entered the workforce. The Labor Force Participation Rate (LFPR) rose to 63.4%, the highest since 2013. Wage inflation rose month over month, but less than some experts expected given the tight labor market. Bonds rallied (yields moved lower) as wage and overall inflation remain persistently low. 

Keep an eye on China and the coronavirus as unknown risks remain but for the moment appear to be contained. How this virus will affect global growth is yet to be determined, but handicapping this virus is nearly impossible and risk-on/risk-off trading could changes daily as more cases are discovered worldwide, and as scientists gain a deeper understanding of the virus.

Homebuilders remain optimistic and with unprecedented wealth creation in the U.S., this year’s home-buying season is shaping up to be a good one. Affordability and availability of home supply are top concerns. Mortgage rates are compelling and we continue to advise prospective borrowers to consider locking-in interest rates at these historically low levels.

Blog Banner 12.6.19

Market Commentary 12/6/19

Jobs, jobs, jobs, and more jobs! The November jobs report crushed expectations Friday morning, with job creation growing at the fastest clip in 10 months. The jobs report reinforces the thesis that the U.S. economy is on good footing, the U.S. consumer remains bullish, and that the recession fears have abated. The report followed other positive reports earlier in the week on housing, big-ticket purchases, and trade. 

On the jobs front, the employment rate dropped to 3.500% with the addition of 266,000 new jobs blowing past the estimate of 182,000 new jobs. The U-6 reading, or total unemployed, fell to 6.90% from a reading last year of 7.6%. Wage growth grew year over year above inflation.

This combination of low rates, a strong consumer, and a strong workforce has created a “Goldilocks” environment. These numbers will keep the economy chugging ahead and work as a tailwind for the housing market heading into next year. As we have opined previously, interest rates remain attractive which provides more buying power for potential borrowers. For refinances, reduced mortgage payments free up money for other purchases. Our position on interest rates at these levels is to grab ’em while they are hot! 

Blog image 11.1.19

Market Commentary 11/1/19

A better-than-expected October Jobs Report capped off a robust week of economic news.    

Positive earnings from America’s best companies for the third quarter reconfirmed that the U.S. economy remains the envy of the developed world and has the resilience to adjust to a difficult trading environment with China.

On Wednesday, the Fed lowered short-term interest rates in what may be the last of rate cuts for a while. However, the Fed’s actions the past few months have steepened the yield curve and pushed financing costs lower, helping to keep the ball rolling on economic expansion. While business investments are slowing, the job market and consumer confidence readings remain strong, and housing remains a tailwind for growth. 

Across the pond, the fear of a chaotic October 31st Brexit was put to rest as well, at least for now. This is all positive for the market and potentially bad for bonds. 

Capping off the week, the September Jobs Report was solid and better than expected with positive revisions to both August and September.  The unemployment rate was a tick higher, up to 3.60% from 3.500%, wage inflation clocked in at 3% annually, and the Labor Force Participation Rate (LFPR) moved higher. In summary, it was a very good jobs picture for the U.S.

With so much good news to share, interest rates have been moving moderately higher, as predicted. Personally, we see no recession and can easily see the 10-year Treasury moving back up to near 2.000% given all the positive economic data recently released. Mortgage rates have been on the move as well. We continue to advise that locking-in rates at these levels is prudent, especially with interest rates still near historic lows.