Tag: jobs report

Market Commentary 9/1/2023 

Posted on by Damon Germanides

Bonds Can’t Catch A Break Amidst Unemployment Rate Increase 

The July Jobs Report brought encouraging signals for both the bond market and the Fed. However, the workforce saw an influx of more workers than could be absorbed, resulting in the unemployment rate rising from 3.50% to 3.80%. While wages are still growing, they are beginning to moderate and show signs of trending lower. This shift might provide the Fed with justification to hold off raising rates at its next meeting. Although the futures market indicates around a 40% chance of a November rate hike, we anticipate that this might mark the last rate increase of the cycle (if it does occur). On the other hand, mortgage bonds and Treasury yields oddly increased, potentially influenced by a weakening dollar and surging oil prices. 

Nonetheless, it’s important to avoid drawing broad conclusions from a single report. Commodity price inflation and service inflation remain high, and the Fed would likely want to see more substantial declines in these numbers. Conversations with local business owners reveal that input costs are eroding profits. Passing these increases on to customers is becoming increasingly challenging. The persistent difficulty business owners have in finding staff is keeping wages elevated. Notably, a major national retailer catering to lower to middle-income consumers, Dollar General, has reported that its customers are feeling financial pressure and adjusting their purchasing habits. This demographic has been hit hardest by elevated prices and could be a significant concern for the Fed. This context supports our belief that even if the Fed stops raising rates, a downward shift in interest rates might be a prolonged journey. Fed Funds rates could remain potentially elevated well into 2024 or even 2025. 

Loan Success Takes Grit 

Navigating the mortgage landscape is no longer a straightforward endeavor. While we maintain access to excellent products and lenders and are successfully closing loans, the path can be turbulent. Underwriting guidelines at banks are tightening, debt funds and mortgage banks are grappling with an illiquid secondary market, and limited housing supply in major cities complicates loan qualification. Financing costs have surged while housing prices have remained stagnant, particularly affecting higher-end home purchases. In this landscape, experienced mortgage brokers are proving invaluable by sourcing better-priced loan options, exploring more nuanced alternatives like interest-only or investment property loans, and connecting with smaller banks that embrace innovative thinking. Our broker team at Insignia Mortgage, for instance, achieved over $40 million in closings in July, while our fix-and-flip and bridge lending arm, Insignia Capital Corp, closed over $12 million in business. It was far from effortless. What matters most is that all our clients successfully completed their crucial transactions. 

Market Commentary 8/5/2023

Posted on by Damon Germanides

Bonds & Equities Shaken By Fitch Downgrade Of US Credit

This week was filled with noteworthy economic developments. The bond market experienced significant fluctuations following Fitch’s downgrade of the US credit rating from AAA to AA. The latest July Jobs Report, though weaker than expected, provided some relief to the bond market (which experienced a notable climb earlier in the week). Nonetheless, persistent wage growth and a tight job market continue to challenge the Federal Reserve. As a result, inflation remains a concern at the forefront.

Amidst these developments, other factors are contributing to inflationary pressures. These factors include rising commodity prices, geopolitical tensions, and potential labor strikes. While the immediate impact of the Fitch downgrade may be limited, it serves as a vital reminder that addressing long-term spending issues is important for our nation’s prosperity.

The Future Of Rates & The Impact Of Inflation

The path of interest rates remains uncertain. Some potential scenarios range from further rate hikes due to wage inflation to a soft-landing recession narrative. All outcomes necessitate careful navigation of the Fed’s interest rate and QT policies. While we observe signs of falling inflation, wage inflation persists, leaving room for at least one more potential rate hike (if not two) in the future.

On the other hand, the consequences of the Fed’s substantial rate hikes over the past year and QT policies are gradually seeping into the financial system. As interest rates rise, lenders are tightening their loan offerings. Narrowing such loan options could impact economic growth in the coming months. Even so, it is worth noting that the American consumer has demonstrated remarkable resilience, readily accepting higher interest rates and loan payments.

The normalization of mortgage rates on a historical basis is apparent, but when combined with soaring home prices, the overall cost feels steep. As a result, the existing home sale market has experienced a slowdown in activity. At the same time, some market segments have witnessed odd price increases due to a lack of available housing supply. Despite these challenges, the adaptability of consumers underscores their ability to weather economic fluctuations.

Market Commentary 7/21/2023

Posted on by Damon Germanides

Markets Party On As Risk Appetite Grows Amidst Discounting Higher Rates

The investment landscape remains complex, as it has always been. With the constant influx of daily reports and updates, it’s easy to be distracted by market movements and opinions. In the equity markets, big tech companies have led to significant gains for some investors. Conversely,  a more balanced approach has yielded only moderate returns or worse for others. The risk-on trading sentiment seems to be prevailing, even as interest rates rise and the Fed indicates a prolonged period of higher rates.

In the housing market, although new home builders are thriving, existing home sales face challenges in major cities due to limited inventory.  As many banks pull out of the mortgage market and layoffs have become more common, the mortgage world shows it is not immune to its share of challenges. Smaller banks and credit unions step in to fill the gap, providing opportunities for boutique firms like ours to match borrowers with lenders who prioritize community growth, common-sense underwriting, and personalized service.

New Standards On The Horizon: Inflation, Debt, & Consumer Spending

Equities surge and multiple offers continue to be prevalent in the more affordable section of the housing market. We can’t ignore the broader economic concerns of these behaviors becoming almost the standard as they relate to the inflation fight. Unemployment remains ultra-low and the employment pool tight, commodity prices are on the rise, the 2-year Treasury rate is nearing 5%, and consumers continue to spend (even if by way of debt). It is hard to model how the massive Covid-related money spray and multiple Government stimulus programs will affect inflation. However, there is a greater than zero probability that inflation readings show signs of acceleration come the fall. This may be one reason the Fed is expected to raise rates next week and possibly again in September.

While the markets and consumers seem comfortable with the Fed’s rate hikes, we remain cautious. Powell’s warnings about potential pain may not have materialized yet, but we believe it’s essential to monitor the situation closely.

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.

Market Commentary 6/30/2023

Posted on by Damon Germanides

Equity Markets Dismiss Central Banks’ Inflation Concerns

The resilience shown by the equity markets and the US economy has surprised many, us included. While we have previously expressed concerns about a possible recession, the economy continues to strengthen. Most forecasters have interpreted the upward revisions to GDP, a tight labor market, and a stabilizing housing market as a sign of two more rate hikes to be added by the Fed. This prediction comes amidst rising worries over the economy picking up the pace again. The latest PCE report has indicated a slowdown in overall inflation. Nonetheless, the report still highlighted persistent service inflation at 4.6%, supporting recent comments from the Fed about the need for higher interest rates in the long run.

A Case For Higher Rates

Real estate investors typically focus on interest rates, construction costs, and cap rates. On the other hand, the equity market is a key indicator of consumer sentiment, risk appetite, and innovation. The recent surges in the tech-heavy Nasdaq index should drive increased demand for home purchases and renovations. Individuals who have seen their equity holdings rebound may be more inclined to invest in a larger and better home. Despite the cooling of the spring buying season, we are witnessing a rise in pre-approvals for new homebuyers. These buyers are willing to accept higher interest rates in a tight existing homes market, likely due to an increase in their financial assets. This so-called wealth effect is what the Fed is trying to curb, but even with substantial rate hikes, its impact has yet to materialize fully. Consequently, we believe that the Fed may veritably raise rates further, with a 6% Fed Funds rate not outside the realm of possibility.

A Case For Lower Rates

Conversely, an argument can be made for maintaining rates at current levels. With consumer spending slowing down, as stimulus measures wind down, and as lenders become more cautious in their underwriting criteria. Each day, higher interest rates have an impact on real estate investors, business owners, and borrowers, as the cost of financing all types of debt has significantly increased. While goods inflation has declined, service inflation may follow suit. Rental prices are also dropping. While the equity markets have experienced a rally, most gains are attributable to a handful of large technology companies. Excluding these companies would leave the overall market relatively flat. Additionally, the 2-10 spread, a measure of the yield curve, is significantly inverted by over 100 basis points. Such inversion is generally seen as a concerning sign and may indicate that financial markets are already facing significant constraints.

Market Commentary 6/16/2023

Posted on by Damon Germanides

The Fed Delivers A Hawkish Pause

The Federal Reserve’s dot plot strongly suggests that interest rates will continue to rise in increments of 0.25 basis points, with potential hikes in both July and September. This trajectory would bring the Fed Funds terminal rate to 5.75%. However, accurately predicting the impact of further rate hikes on the economy is a difficult task. There are valid arguments both for raising interest rates and for taking a pause.

Despite some concerning economic data, the US equity market has recently experienced significant growth. Even a hawkish Fed has had little influence on cooling off this recent rally. In the face of such data, this rally creates a wealth effect and eases financial conditions. Such does not align with the Fed’s intentions. Additionally, the US consumer remains strong, evidenced by better-than-expected retail sales. The housing sector, particularly in more affordable segments, has seen a surge. Multiple offers are becoming common in spite of mortgage rates hovering around 6.00%, with rates having doubled compared to over a year ago.

The State Of The Economy

Regardless of these small successes, several manufacturing reports indicate a weakening economy. The yield curve has steepened again and weekly jobless claims have risen, all of which support the argument for a pause by the Fed. It’s worth noting that labor is a significant cost for most businesses. With a tight labor market, wages have moderated yet continue to rise. The Fed considers wage inflation and a tight labor market as factors that justify ongoing rate hikes.

The current expensive stock market, fueled by AI mania and investors trying to catch up after anticipating a market downturn, may have a positive effect on residential real estate. Investors recouping losses or utilizing gains to purchase homes can contribute to this result. Nonetheless, mortgage underwriting remains challenging. Banks are not giving money away despite higher interest rates. Our office diligently surveys over 20 lenders daily to find the best execution for prospective borrowers. With almost 20 years of experience in the industry, we can confidently say that these are some of the most challenging times. The main cause of these current challenges is the combination of a tight housing supply, the limited amount of new construction in our primary market, and the overall high cost of coastal housing markets. 

Market Commentary 6.9.2023

Posted on by Damon Germanides

Markets In Rally Mode Heading Into Fed Week

Various markets are displaying unpredictable behavior as the US financial landscape presents challenges. Despite concerns expressed by many public companies regarding earning growth, inflation, and increased capital costs, several AI-focused tech giants have propelled equities back into a bull market. Residential real estate, too, remains resilient. Despite higher mortgage rates, housing stocks are near all-time highs and prices are holding steady in most market segments.

While leading economic indicators and sentiment readings suggest a potential recession, employment data continues to surpass expectations. The most recent weekly unemployment figures were higher than anticipated. Credit conditions remain tight, with further tightening observed. Currently, default rates remain relatively low, primarily concentrated in commercial office spaces to date. The likelihood of a soft landing in the economy has improved. The recent substantial equity rally prompts speculation about the potential for a different outcome this time despite the memories of significant market downturns (the 2000 tech bubble and the 2008 financial crisis) still resonating among older generations.

Looking Ahead: Inflation & Rate Hikes

The upcoming Federal Reserve meeting carries significant weight as investors eagerly anticipate insights from Chairman Powell and the committee. The consensus points to a hawkish pause in rate hikes, with another potential increase in July. That being said, recent equity market strength and surprise rate hikes in countries like Australia and Canada suggest that a 0.25 basis point hike in June cannot be entirely ruled out. The release of important inflation reports early next week may further influence the committee’s decision, especially if it reveals a higher-than-expected inflationary environment.

Market Commentary 6/2/2023

Posted on by Damon Germanides

All Eyes Focused On Upcoming Fed Meeting As Jobs Report Exceeds Estimates 

Another positive May Jobs Report has exceeded expectations, reflecting the current strength of the US economy. This places additional pressure on the Fed and its data-driven policies. Recent Fed messaging has hinted towards a potential pause in short-term interest rates. Now, the robust jobs report, growing housing demand, and improved GDP forecast may push the Fed towards another rate hike in June (odds are at 33% for a rate hike at the moment so this is a non-consensus view).

In the non-ultra luxury local housing market (which we internally categorize as those homes priced under $3mm) we are witnessing a surge in multiple offers, with all-cash and no-contingency offers becoming increasingly common. Despite the recent rise in interest rates, the lack of housing supply is pushing buyers to compete and bid higher for their purchases. This trend is not limited to our local market, as similar situations are being observed in other markets as well. There is a concern that a resurgence of higher inflation will occur if the Fed does not proactively address the situation,  as housing and related services comprise a significant portion of the economy. Although higher interest rates can be challenging, failing to address inflation adequately is akin to only partially treating an ailment with antibiotics.

The counterargument for raising rates is that several leading indicators are showing signs of a slowing economy including lower commodity and energy prices and anemic global growth. This is why some are in the wait-and-see camp. When it comes to interest rates, there are a number of factors to consider. Firstly, the resolution of the debt ceiling may push bond yields higher as the Treasury introduces a substantial amount of fresh debt into the market. Additionally, bank balance sheets remain constrained. Recent reports indicate that lending to smaller businesses needs to be reduced or delayed due to high financing costs. Lastly, the inverted yield curve is currently at -82 basis points, which historically raises concerns and keeps us vigilant about a potential recession.

Brokerages Over Bankers

In the residential lending landscape, mortgage brokerages like Insignia Mortgage, with access to diverse funding sources (ranging from private banks to no-income verification financing, investment property financing, foreign national financing, and various government programs) enjoy a significant advantage over mortgage bankers and retail bankers. This dynamic environment highlights the importance of a well-connected and versatile mortgage brokerage in today’s fragmented banking world.

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.