06_11_2021_blog

Market Commentary 6/11/21

Mortgage Rates Lower Surprisingly As Inflation Picks Up

It’s hard to make heads or tails as to why bond rates have fallen as of late in response to very hot inflation readings. Bond yields have been driven lower, helped in part by central bankers championing ultra-easy monetary policy and longer QE. The old adage that the cure for inflating input costs and consumer goods is even higher costs, which may have peaked in May. This idea has considerable support and it has become part of the Fed’s transitory inflation thesis. However, the Fed is seeing its desired response on wage inflation take hold (higher wages), but higher wages are not transitory. Once an employer raises wages, it is nearly impossible to reduce them later. The hope is that wage inflation sticks around and goods inflation recedes. The risk is a return to an inflationary world or even worse, stagflation. We are watching unprecedented fiscal and monetary intervention in real-time on a global scale which could have unintended consequences.  

Given the dip in interest rates, there seems to be little room for rates to move lower. With CPI data running at 5.00% year over year, real interest rates are running negative. At the important Fed meeting next week, Fed Chairman Powell will need to provide clarity as to why an improving economy with over 9 million available jobs, needs more stimulus and why interest rates should be prevented from normalizing. We are certainly in crazy times.

With the 10-year Treasury note near 1.500%, many strategists are firming up their belief that now is the time to refinance your mortgage. If prices in your zip code have risen, low rates may still make it worthwhile to buy a new home. We recommend locking in longer-duration mortgages because if trends shift direction, then higher mortgage rates could be here for quite a while.

05_28_2021_blog

Market Commentary 5/28/21

Mortgage Rates Stay Low As Inflation Debate Heats Up

The Fed’s favorite inflation reading, Core PCE, rose the most since 1960 and clocked in at 3.10% annually for April. This came as no surprise as everyone is seeing what inflation looks like when they pay their bills at the end of each month. The bond market waived off the report as no big deal as bond yields are lower in light trading. Perhaps the White House’s $6 trillion budget proposal and all the new taxation associated with it is keeping bond traders calm. Higher taxes will curtail spending on goods and services which will lower demand and in theory, could prove the Fed right that inflation is transitory. However, there is cause for concern as businesses, especially smaller businesses, can only absorb so much in added cost before being forced to raise prices. Also, the spread between home prices versus home affordability has stretched and should be monitored.  

Many goods and services are out of stock which has led to more demand than supply and therefore price increases. In my experience, once prices rise except for commodities, they rarely come down. This is the counterargument for a more structural move in inflation and not the transitory one coming out of the Fed. Also, wage inflation is taking shape. Due to a lack of workers, businesses are paying more for employees. Again, in my many years in business once you offer someone a higher salary it is hard to take it away. With this in mind, if the Fed is wrong in its position on inflation, the back half of this year could be volatile. If interest rates rise further than expected due to a change in inflation trajectory, there will be shifts in home purchase and home refinance demand as well as a re-pricing of high beta stocks that are using near-zero discount rates. We continue to advocate that borrowers should not wait to lock in historically low interest rates as inflationary pressures grow.

05_29_2020_blog

Market Commentary 5/29/20

Core inflation is non-existent in the U.S. and for the moment presents no challenges to the Fed.There’s a massive stimulus being pushed out to the debt and equity markets as well as to Main street in response to Covid-19’s biologic shock translating into an economic one.

On Friday, Fed chair Powell reiterated a by-any-means-necessary attitude to support the economy in the event of the second wave of virus-related economic setbacks. Later in the day, the equity markets responded with relief to President Trump leaving the U.S.-China trade deal untouched.

Mortgage rates have remained flat even after Core PCE fell to less than 1%. While we believe mortgage rates will move lower later in the year, we still believe that banks are keeping interest rates padded above their corresponding benchmark U.S. treasury yields while simultaneously keeping an eye out for easing loan deferments and reduced unemployment. 

Americans’ savings continue to increase due to a combination of government assistance and sheltering in place. Evidence is mounting that consumption will rebound as life begins to return to normal. Traffic to websites such as Zillow has surged as prospective home buyers are researching potential new homes. Also, the stay-at-home orders have prompted people to re-evaluate their current housing situations. As a result, many families are deciding that it is time to look for a new home or upgrade their current home. 

In closing, Insignia Mortgage’s brokers are encouraged by the increase of purchase activity in the last few weeks. The coronavirus situation has temporarily stalled action in the real estate market, boosting supply. Buyers are definitely taking advantage of this situation and benefitting from historically low mortgage rates, which make housing payments very manageable.

02_21_2020_blog

Market Commentary 2/21/20

The 30-year U.S. Treasury bond hit an all-time low on Friday as investors fled riskier assets and sought the safe haven of U.S. government-guaranteed debt. The causes for concern were weak overseas manufacturing data and ongoing uncertainty in handicapping how the coronavirus (now named “COVID-19”) will affect economic growth in the coming months. Should this virus become more of a problem, interest rates will plunge. For now, no one knows how this virus will evolve, but to date, it appears to not be as deadly as biologically similar infections.

Earlier in the week, bond yields held firm even after hotter than expected PPI and Core PPI inflation readings.   

Home buying season should be a good one with interest rates remaining low for the foreseeable future. Supply and affordability will be the bigger issue, especially in the more expensive coastal markets. Building permits surged but housing starts fell which should put even more pressure on short term supply concerns. 

With rates near historic all-time lows, we continue to believe that locking-in is the right course of action. The wild card is the potential threat that the coronavirus will have on global productivity. For now, that risk is low, but it may change. If the virus becomes an international pandemic, expect the U.S. 10-year Treasury to touch 1% or lower.  

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.

01_31_2020_blog

Market Commentary 1/31/20

The coronavirus fears continue to weigh on the global financial markets after having been declared a global health crisis. For the moment, this has pushed yields lower in the U.S. and slammed equities. We are keeping tabs on how this outbreak plays out and how it may affect global economic growth. 

The bull case for equities and real estate acquisitions is supported by low unemployment and low inflation, a dovish Federal Reserve, and a vibrant consumer. The bear case for equities and predictions of an economic slowdown are spurred by uncertainty surrounding the coronavirus, mixed corporate earnings, and softening manufacturing data. Fears of recession remain remote but keep an eye on short-term rates which inverted the other day.

With respect to mortgage rates, we are back to near historically low-interest rates. It remains very hard to argue against locking-in rates at these levels, but rates could potentially drop further if the world comes to a halt while international health officials try to contain the spread of this new virus. However, we remain biased toward locking-in interest rates at these ultra-low levels.

01_24_2020_blog

Market Commentary 1/24/20

Stocks dipped and bond yields fell in a light economic news week, but nonetheless, it was a week filled with plenty of market-moving events. The fears of a new coronavirus out of China moved money from riskier assets into the safe haven of government bonds. Also, soft global PMI data helped to lower bond yields, which remained flat but may have bottomed. 

Back here in the U.S., on the one hand, the consumer remains bullish as equity and real estate asset prices are at historical levels supported by a dovish Federal Reserve interest rate policy.  While on the other hand, business leaders are skeptical and large scale purchases are soft. 

With the U.S. economy expected to grow between 2.00% and 2.50%, the consensus is that it will continue to hum along and equity indexes will continue to reluctantly move higher. Some recent positives supporting that narrative include the Phase 1 U.S. – China trade deal and the expected signing of the USMCA agreement. 

The strong consumer should bode well for a strong spring homebuying season so long as sellers don’t push prices back up in response to a very accommodative interest rate environment and strong demand. Interest rates are also spurring refinances as refinances lower monthly debt service payments and or cash-out refinances tap home equity to pay down more expensive debts. 

With the 10-year Treasury bond set to close below 1.700%, our continued view is to take advantage of these near historically low rates. However, a “Black Swan” event such as this new virus that broke out in China could temporarily push U.S. bond yields much lower if government health officials cannot contain the spread of the virus. For perspective, very few people to date have been infected with this new virus, and the fears of widespread contagion are remote, as of this writing.

01_17_2020_blog

Market Commentary 1/17/20

U.S. equities charged higher spurred on by low-interest rates, solid consumer sentiment, low unemployment, good corporate earnings, and the signing of the U.S.- China phase 1 trade deal. With the Dow likely headed to 30,000 and home builders accelerating construction starts, it appears the spring buying season should be favorable. Consumers feel flush as retirement plans swell and wages also move higher. All of this is positive for this year’s new and existing home sales. Keep an eye on prices. With such tight supply, we hope sellers don’t price new buyers out of the market given the strong consumer sentiment we are seeing.

The U.S. economy continues to be the best house on the block and with the Fed holding steady on its accommodative monetary policies we expect this Goldilocks environment to carry on for the near term. The presidential election could create volatility, but that won’t come in to play until the back half of the year. Interest rates remain attractive as the developed world is awash in low or negative-yielding debt, which has helped keep our own interest rates capped back home. However, inflation, which has been non-existent for the last decade, is showing signs of reviving. Should inflation move past Fed targets, we could see bond yields move higher and quickly. For now, most strategists have the 10-year Treasury yield pegged between 1.900 – 2.500%.

With that in mind, we continue to advise locking-in interest rates at these levels. It is a call we have been making for quite some time, but given the abundance of positive information hitting the markets, and the fact that the market has shrugged off negative-market-moving news so quickly, our feeling is interest rates have a greater chance of moving higher than lower.  One interesting point: a study was recently completed that showed that negative interest rates have done little to boost economic activity in Europe and Japan. While I am not an economist, I have always thought that lending one dollar to get back less than the principal does not make much sense.

Dec-20-blog

Market Commentary 12/20/19

The U.S. equity markets traded at all-time highs on the last full trading week of the year. The market’s soaring prices were propelled to record levels by accommodative monetary policy, positive news on the U.S. – China trade deal, a strong consumer, and unwinding of recession fears. Final GDP 3rd quarter numbers were also released on Friday and were not revised, showing economic growth growing at a respectable 2.1%. Overall, the U.S. economy is in good shape and the recent stock market gains are a vote of confidence, supporting that narrative.

Homebuilders remain confident and housing starts surprised to the upside earlier in the year. Most economists had predicted the 10-year U.S. Treasury would end 2019 at above 3.000%. The plunge lower in rates (10-year U.S. Treasury currently at ~1.92%) has been a big factor in spurring home purchases and refinances, as well as underpinning the surge in equities and other asset prices. If rates remain low, we would expect the consumer to remain bullish and continue to spend on autos, homes, and other high-cost durable goods.

Banks remain aggressive on pricing and mortgage banks continue to serve the demand by self-employed borrowers who face challenges documenting their income. Rates are low and should be locked-in. Continued positive data both in the U.S. and abroad could lift rates higher. Then again, maybe they won’t.

Market Commentary for October 4, 2019

Market Commentary 10/4/19

In another volatile week in the markets, the September jobs report helped soothe recession fears with a report that came in close to estimates. After a poor ISM reading (Institute of Supply Management) and service sector reading earlier in the week, some forecasters were fearing a terrible jobs number. We are happy to report that this not come to fruition. While we are certain that volatility will be a given, it is hard to argue that a recession is on the horizon considering the very low 3.500% unemployment rate.

The September jobs report was solid for a number of reasons. First, the market was primed to expect a major dud. Secondly, there were upward revisions from the past previous reports (i.e. there have been even more people working).  Thirdly, unemployment dipped to a 50-year low and the U-6 reading, which includes those working part-time and those “discouraged” workers who’ve stopped job-hunting, dipped to 6.9%. Finally, wage inflation is under control which puts a lid on bond yields.  

Housing has rebounded, and low-interest rates are boosting mortgage applications. Lower monthly housing payments free money up in consumers’ budgets, which can be spent on other goods and services, which helps the overall economy.

With the September jobs report behind us, and the 10-year Treasury yielding around 1.51%, we are recommending locking-in loans at this level.  While rates could go lower, it is hard to imagine a <1% 10-year Treasury yield for the moment, given the current generally healthy state of the U.S. economy.