Tag: market trends

Market Commentary 9/20/2024

Posted on by Damon Germanides

How Low Will The Fed Go?

Recent Conversations on Rate Movements

Mortgage rates have been trending lower in anticipation of a potential Fed cut. The implications of recent interest rate movements have been the focal point of recent discussions between Insignia Mortgage and our network of clients, real estate brokers, and bankers. Of critical concern is the actual short-term rate cut at the Fed’s forward guidance, commonly referred to as the “Dot Plot.” This guidance signals what Chairman Powell described as a “recalibration” of interest rates, with the median Fed Funds rate projected to decline to 3.375% by the end of 2025, down from 4.75% today.

Why the 50 Basis Point Cut?

The Fed’s dual mandate is a delicate balancing act to maintain stable prices and robust employment. With signs of a softening labor market, the Fed has determined that lowering rates is necessary to realign the economic environment. Prior to the meeting, there was significant debate over whether the cut should be 25 or 50 basis points. Supporters of the 50 basis point cut argued that a slowing economy warranted more aggressive action, while proponents of a smaller 25 basis point cut highlighted factors such as record-high stock market levels, persistent inflation, ample liquidity, and a still-healthy 4.2% unemployment rate.

A 50 basis point cut is uncommon, and as this decision takes hold, some are questioning what specific data may have driven the Fed to take this larger step. The issue is whether the Fed sees economic weaknesses that the broader market may not yet fully grasp. The economic data remains mixed, with some indicators surpassing expectations while others underperform. Be reminded should inflation pick up, the Fed will be quick to respond, especially if the markets overshoot on rate expectations and animal spirits take hold.

Impact on Mortgage Rates

As anticipated, interest rates have been trending down ahead of the Fed’s decision and mortgage rates have benefited. Currently, mortgage rates hover between 5% and 6%, with some high-net-worth clients securing rates below this range. Lower rates could stimulate homebuyer activity and potentially motivate sellers, many of whom have held off due to high financing costs, to finally list their properties. This would provide much-needed relief to the housing market, which has been constrained by limited supply, high prices, and elevated interest rates. After nearly two years of multi-decade highs in mortgage rates, this drop offers welcomed relief to both the residential and commercial real estate sectors—industries that are highly sensitive to rate fluctuations.

How Low Could Rates Go?

Looking ahead, mortgage rates may settle between 4.5% and 6.5%, depending on the length of the fixed-rate period. Borrowers seeking short-term floating or adjustable-rate mortgages could see rates below 5% in the coming months as the Fed continues to ease short-term rates. However, several headwinds could keep long-term rates higher than some might hope. These include a growing federal deficit, the substantial government debt burden, large-scale financial commitments to green the economy, and the significant investments needed for businesses to adopt and integrate artificial intelligence to remain competitive.

Market Commentary 08/16/2024

Posted on by Damon Germanides

Mixed Signals Push Mortgage Rates Lower

Input and consumer inflation continue to decline, indicating a strong week for the equity markets. It’s important to note that inflation is still rising overall. The cumulative effects of inflation remain a significant challenge for many working families. Retail sales exceeded expectations once again, highlighting the resilience of the U.S. consumer. Nonetheless, with rising credit card balances, reports of laid-off employees struggling to find new jobs, slowing travel, and low- to middle-income consumers running out of cash, there are growing concerns that the economy may be on the brink of a recession.

The decline in bond yields across the curve reflects concerns about the health of the U.S. economy. Even with lower rates, the housing market—particularly in the lower to middle segments—has not seen a significant boost. Homes are staying on the market longer and buyers are struggling to qualify for their desired properties. On the other hand, the upper end of the market remains active, as wealthier individuals enjoy cash generated in the equity markets and risk-free returns over the past few years.

The de-inversion of the yield curve, along with the rise in unemployment, has old-time economic historians on edge. When unemployment increases by 50 basis points (0.5%) or more from its low, it often signals that a recession is on the horizon. We’ve already exceeded that threshold with July’s unemployment reading.

This concern is echoed in conversations with business owners ranging from small operators to large family-run or private companies, with hundreds or even thousands of employees. While the challenges may not yet resemble those of a deep recession, the business environment is undeniably less fluid and more difficult than in recent years.

For those of us in real estate, there may be light at the end of the tunnel if interest rates continue to decline. Rates are finally dropping below 6% on many products, indicating hope that the worst may be behind us. Lower rates should provide much-needed relief to homebuyers across the market.

Market Commentary 07/26/2024

Posted on by Damon Germanides

Mortgage Rates Move Lower With Cooling Inflation

Mortgage rates performed well this week as inflation showed signs of cooling. Next week, the Fed meets to share its outlook on the economy, the direction of interest rates, and inflation’s trajectory. This meeting is crucial, as there are warning signs that the economy is slowing, such as poor consumer confidence readings, and very high credit card balances. The cumulative rise in inflation has hit many hard and the average consumer is stretched thin. Nonetheless, the economy continues to chug along, as evidenced by the better-than-expected GDP reading this week.

Should interest rates fall further, you could see jumbo ARMs down into the mid-5% range, which is great news for the luxury market. For first-time home buyers or middle-market buyers, some community-based programs up to $1M are being offered with rates at or below 6%. Interest rates below 6% offer welcomed support to this market in qualifying for mortgages. Remember, it was not that long ago that mortgage rates were well over 7% and in some instances touching 8%.

With an election around the corner, it will be fascinating to see how the Fed navigates the next two meetings. The Fed aims to remain politically agnostic, so there is a low probability that the Fed may cut rates in July to avoid influencing the election. While we believe interest rates are restrictive, we are not convinced the Fed is ready to make the final cut. One look at how equities bounced back this week illustrates how much liquidity is still in the market. Also, corporate spreads remain very tight, suggesting too much money is chasing too few deals. However, market momentum pushes yields lower, and we will take it.

Market Commentary 06/21/2024

Posted on by Damon Germanides

Housing Inventory Remains Tight As Mortgage Rates Drift Lower

Existing Home Sales: Trends and Insights

Existing home sales data has confirmed what industry insiders already knew: home inventory is extremely tight in many parts of the country. California is no exception. Home valuations continue to rise despite increased interest rates. There is growing optimism that interest rates have leveled off. Should rates drift lower, there’s a possibility for an increase in existing home inventory. Additional inventory could pressure sellers, but it would provide potential buyers more options across affordable, mid, and luxury home spaces up to $5M, significantly boosting activity.

The Rise of Non-QM Loans

Non-QM loans, typically offered by smaller banks, credit unions, and mortgage banks, provide more favorable guidelines, higher debt-to-income ratios, and interest-only products for borrowers who can’t qualify through traditional means. These “individual lending” loans do not rely on rigid guidelines. Instead, they focus on bank reserves, bank statement cash flow, foreign income, or rental income to qualify borrowers. Despite concerns about a repeat of 2008, these loans go through robust underwriting and require significant borrower investment, contributing to their strong performance since their introduction about a decade ago. Insignia Mortgage has identified non-QM lenders that are now comfortable with larger loan sizes up to $10M. 

Economic Outlook and Mortgage Rates

The economy presents a mixture of good and bad data. Technological advancements have created efficiencies, which some forecasters believe will lead to lower rates. However, input costs, commodity costs, and service costs remain high, hurting small business owners. Government debt remains a worry and needs to be monitored as the deficit continues to balloon. However, recent Fed comments have given the all-clear for banks to gradually lower rates. A+ borrowers will start seeing offers under 6%, and non-QM borrowers will find rates in the high 6’s to low 7’s, benefiting the existing home sales market.

Indicators for Mortgage Rate Trends

Monitoring oil prices and the 2- and 10-year Treasuries provides insights into mortgage rate trends. Oil prices and interest rates are closely correlated, moving symbiotically. The 2-year Treasury is a good proxy for shorter-term jumbo ARM pricing, such as 5-year ARMs, while the 10-year Treasury serves as a proxy for jumbo 10-year ARMs. For instance, with the 10-year Treasury down about 35 basis points recently, many jumbo lenders have lowered rates on their 7- and 10-year ARM products by about 25 basis points, offering a reliable estimate of rate direction and potential decreases.

Market Commentary 06/07/2024

Posted on by Damon Germanides

Stronger Than Expected May Jobs Data Pressures Bonds

We were initially encouraged by the JOLTS report which showed signs of a cooling economy as interest rates trended lower, earlier this week. However, Friday’s much better-than-expected May jobs report exceeded expectations for job creation and wage growth, reversing this trend. As a result, interest rates surged, and the likelihood of a Fed rate cut has been pushed to September. Those hoping for rate cuts are focusing on the rise in the unemployment rate to 4% as a sign of a subtly eroding economy.

While there are early signs of consumer stress, such as rising credit card balances and commercial real estate defaults, it is difficult to justify a near-term rate cut after today’s employment report. Cumulative inflation has been a significant drag on our most vulnerable citizens. However, the consumer remains in good shape overall. The stock market is at record highs, with a resurgence of FOMO, reminiscent of the Gamestock mania. We will listen closely to Chairman Powell’s insights on the economy and the direction of rates. The anticipated pain that Powell suggested would be needed to bring inflation down never fully materialized. With the upper 30% of the US population enjoying strong home price appreciation, stock market wealth, and rising wages, the loosening of financial conditions may stoke further inflation.

Trending In Real Estate Finance

Smaller banks and creative lenders are making exceptions on home loans that make sense. We are seeing some banks begin to waive income requirements for very liquid borrowers, increase debt-to-income ratio limits to 60% for the right profiles, and accept a credit blemish or two with a good explanation. Given the slowing existing home sale market, lenders who can lend are doing what they can to approve loans. This is significantly helping good borrowers secure home loans that they would have easily qualified for just a few years ago. Notably, interest rates remain range-bound, and lenders remain eager for business, with our best-priced lenders offering rates under 6% for well-heeled applicants.

Market Commentary 5/3/2024

Posted on by Damon Germanides

Fed Believes Inflation Will Decline Without Further Rate Hikes 

Markets found solace as the Fed committed to returning inflation to 2% without the need for further interest rate hikes. The April Jobs Report was disappointing while jobs growth came in lower than expected, pushing yields on Treasuries and mortgage-related products lower. April non-farm unemployment clocked in at 3.9% up a tick and hourly wage growth cooled, a data point that must stabilize for the Fed to begin lowering rates.  

The economy’s trajectory remains uncertain, compounded by the unprecedented government spending in response to Covid. The influx of funds continues to impact the economy in unforeseen ways, challenging traditional economic models’ predictive accuracy. 

Overall, the economy remains a mixed bag and is a fool’s errand predicting where interest rates and the financial system are headed.  Even the Fed, with a world of data and Ph.D.’s, has been wrong during the last few years. With trillions of dollars moving through our economy, many economic models were not designed to interpret this type of spending with accuracy.     

Keep an eye on the Treasury issuance as the Government has increased the money it will need to borrow for Government funding.  This may put a floor on interest rates overall.  However, for the moment a 10-year Treasury of around 4.50% feels about right given the uncertainty in the world. 

Market Commentary 04/26/2024

Posted on by Damon Germanides

Equity Markets Bounce Back As Inflation Firms

The near-term trajectory of interest rates became increasingly ambiguous this week. GDP growth rates slowed more than forecasted while inflation firmed up, indicating a prolonged path to reach the 2% inflation target. The ten-year Treasury yield remains steady above 4.500%, with expectations of staying within a range of 4.500% to 5.00% in the near term. Additionally the upward trend of core PCE, the Fed’s preferred inflation measure, further dampened prospects for a near-term rate reduction. Speculation suggests the first rate cut may not occur until December 2024. Chair Powell is likely to adopt a more hawkish stance given the rise in inflation, consumer spending, and the overall resilient economy.

While the economy appears robust and recession concerns have eased, underlying issues remain. Credit card debt has increased, accompanied by a rise in late payments. This is a strong indication that the surge in living costs is becoming increasingly burdensome, particularly with credit card rates exceeding 20%. Commercial real estate, especially office and some multi-family projects is under considerable stress. With interest rates on the rise, more defaults will be coming. With mortgage rates for conforming loans reaching the high 6’s to mid-7’s and high-quality jumbo loans hovering around the 6’s, there’s apprehension about a potential slowdown in the home purchase market, particularly in existing home sales. Despite this, the new home market continues to attract strong interest driven by home builders, incentives, and access to inventory.

Navigating the real estate and lending landscape in today’s environment poses significant challenges. Banks facing capital constraints and market volatility affect lenders’ ability to lower interest rates in a dynamic landscape. Constantly surveying the marketplace has become a daily practice for our team, enabling our boutique brokerage to secure deals effectively. Understanding the nuances of the market is paramount, given the notable variance in rates—sometimes up to 1/4% – 1/2% —among lenders offering similar products. This underscores the importance of being a broker and having access to a diverse range of products, from private banking and niche portfolio loans to government and conforming loans.

Market Commentary 4/19/2024

Posted on by Damon Germanides

Economic and Geopolitical Pressures Weight On Bonds

Today’s market landscape is challenging to handicap due to global politics and Federal Reserve actions. Risky investments, including high-beta momentum stocks like artificial intelligence, are facing pressure. The market is adjusting to the possibility of fewer rate cuts this year—even just one or none. The Fed has changed course due to ongoing inflation, strong job numbers, solid retail sales, and positive manufacturing data. These factors indicate that rate cuts may be on hold for now. Additionally, with oil prices above $80 per barrel, significant drops in interest rates are unlikely. Despite global efforts to reduce fossil fuel reliance, our economy remains tied to oil, impacting interest rates and inflation.

Interest rates remain higher than expected despite market fluctuations. This persistent high can be attributed to ongoing inflation, a challenging economy, and substantial government debt issuance. The Wall Street Journal reported that mortgage rates for standard loans have risen above 7%. Meanwhile, home sales have dipped during what is typically the busiest season, presenting challenges for buyers facing high prices and limited options in coastal cities.

The rising cost of living may soon affect the housing market. Over time, some homeowners may be compelled to sell to access cash, particularly if equity markets experience corrections. Major companies like Netflix and Nvidia have already seen significant downturns.

It appears that market optimism regarding rate cuts was premature. The recent market dynamics require investors and homebuyers to approach decisions with caution. The Federal Reserve, under its chairman’s leadership, faces a complex scenario that is somewhat concerning. Although the bond market seems oversold, lower rates may not materialize for some time. It is essential to remain vigilant and prepared for various outcomes. Keep a close watch on commercial real estate, as the Fed’s higher-for-longer stance is becoming a significant issue for some asset classes. Remember, volatile times also bring opportunities for well-informed and patient investors.

Market Commentary 3/15/2024

Posted on by Damon Germanides

Hot Inflation Data Takes The Shine Out of Bonds

Hotter-than-expected CPI and PPI data caused bond traders to adjust their expectations on Fed rate cuts, causing a decline in US Treasuries. Despite a decent jobs report indicating continued hiring, many Americans are taking on multiple jobs to cope with rising costs. For example, everyday goods are significantly more expensive than pre-Covid times. On top of that, job creation has been predominantly driven by necessity rather than productivity-enhancing employment.

Nevertheless, the economy displays resilience amidst many negative factors, including credit card and auto-loan defaults, geopolitical tensions, and oil prices hovering around $80 per barrel. Speculative investments in AI, daily options, and crypto remain robust. Such data suggests that financial conditions may not be as tight as anticipated, potentially leading to Fed rate cut disappointments. Although rate cuts would be welcomed, market dynamics currently support a narrative of 1-3 cuts rather than the 6 cuts expected at the beginning of the year. We should gain more clarity on the path of interest rates next week when the Japanese and US Central Banks meet. Japan is expected to move away from negative interest rate policies. 

Despite the rise in Treasuries, mortgage rates remain relatively stable. Banks and financial firms continue to maintain razor-thin margins in an increasingly competitive market. With refinance activity at a 20-year low, success in today’s mortgage market hinges on strong relationships with realtors and financial planners.

Although many homeowners benefit from low-rate mortgages, other expenses such as credit card interest, insurance, margin debt, and household costs continue to rise. The prolonged period of low interest rates has led to an accumulation of homes, with homeowners staying put longer than historical norms. However, signs suggest this trend may be shifting. According to Zillow in February, homeowners in some regions are increasingly likely to list their properties for sale. 

Regarding the recent NAR settlement and its potential impact on commissions, no lenders have yet offered financing options for buyers. This significant ruling is expected to reshape buyer-seller interactions in real estate transactions, and we will continue to monitor and provide updates as necessary.

Market Commentary 03/01/2024

Posted on by Damon Germanides

How Non-Traditional Mortgages Are Benefiting From Animal Spirits

Speculation and momentum are driving many public markets, from cryptocurrencies and zero-day options to companies at the forefront of AI. Even non-fungible tokens are seeing renewed interest. Investors seem willing to take on more risk for less reward, as evidenced by compressed bond and equity spreads. Expectations of higher interest rates persist, yet animal spirits remain strong, suggesting that financial conditions may not be as tight as feared. The outlook for rate cuts has diminished. Renewed discussion by economists indicates the possibility of only one expected cut (the consensus of 3 cuts remains).

Interestingly, in the residential mortgage market, non-traditional lenders are competitively pricing single-family, mortgages. Borrowers with some income documentation, good credit, and a larger down payment, may secure mortgages at rates in the mid-6s. This represents a significant improvement from just a few months ago, particularly for non-QM products catering to less traditional borrowers. Also, these lenders continue to raise jumbo loan limits. These products, only slightly higher in interest rate than traditional loans, support real estate and mortgage brokers in their accessibility. 

A recent bullish publication featured balloons floating into the sky, which may indicate a sign of market exuberance. Front-page stories often precede market peaks, and while we say this half-heartedly, it’s worth noting. Despite potential headwinds such as geopolitical tensions, higher oil prices, and persistent inflation, the market seems to be discounting them for now. If sentiment turns, bonds could rally. This would push mortgage yields lower right in time for the spring buying season.