Tag: Mortgage

Market Commentary 12.15.2023

Posted on by Damon Germanides

Fed Forecast To Bring Down Rates Pushes Mortgage Rates Lower

The recent dovish pivot by the Federal Reserve, along with projections of up to three rate cuts next year, brought a sigh of relief to the markets. Equities, bonds, gold, and oil, all rallied in response. This shift by the Fed signaled a so-called “soft-landing” narrative. Inflation data has been pointing toward lower inflation as the economy continues to move forward with weak manufacturing data, but a strong service sector.

Mortgage rates also saw a significant drop, with 30-year mortgages now below 6.50%, and adjustable-rate mortgages anticipated to dip below 6%. This is a remarkable change from just a few weeks ago when mortgage products were touching 8%. Let’s delve into the reasons behind this sudden change of heart by the Fed and the markets.

Inflation Trends

Consumer and producer inflation data have been showing positive trends for quite some time. With inflation on the decline, the Fed Funds Rate, currently at 5.37%, stands well above the inflation rate (CPI) of 3.1%. This significant spread is viewed as restrictive, and now the Fed must consider if keeping rates higher for an extended period might do more harm than good. Additionally, signs of a slowing economy are emerging, which further supports the case for lowering interest rates.

Inverted Yield Curve

The yield curve has been inverted for an extended period, and the Fed would like to see it normalize. This normalization would benefit lenders who borrow short and lend long. When long-term interest rates are lower than short-term interest rates, it becomes challenging for lenders to generate profits due to the negative spread. A robust economy requires lenders willing to extend credit. Moreover, the massive US debt and the costs associated with servicing that debt become unsustainable at higher interest rates.

Quantitative Tightening (QT)

The ongoing QT (Quantitative Tightening) may provide the Fed with some flexibility to lower short-term interest rates and allow bonds to run off their balance sheet. Over the past decade, global central banks’ money printing and bond buying have led to enduring issues, as the cost of money became distorted. By lowering the Fed Funds Rate while continuing QT, the Fed remains somewhat restrictive but with a bit less tightening.

Nonetheless, we still anticipate a 10-year Treasury yield north of 4% and encourage clients to pursue financing at these current rates. We believe that the journey from 3% to 2% inflation will be challenging, and the so-called neutral rate of interest will likely settle above 3%. When you add a term premium of 1% to 1.5%, that’s where the 10-year Treasury should find its equilibrium.

10 Year Treasury & Employment

As previously stated, we continue to anticipate a 10-year Treasury yield north of 4% and encourage clients to pursue financing at these current rates. We believe that the journey from 3% to 2% inflation will be challenging, and the so-called neutral rate of interest will likely settle above 3%. Employment remains tight and wages appear to be sticky (and possibly rising again) which will continue to be monitored by the Fed. This could inhibit interest rates from going much lower than current levels.

For the moment, we will take the late-year gift from the Fed of the prospect of lower interest rates which is leading to a big pickup in borrower inquiries.

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 3/31/2023

Posted on by Damon Germanides

Slowing Inflation Encourages Market 

While the recent banking crisis appears to be receding, there are still issues to be dealt with. Our belief is this will not become a 2008-type event, but the failure of SVB and Signature Bank has shown how fragile our banking system is as well as how quickly panic can set in. It only took two days for SVB deposit withdrawals to crater the bank. The long-term ramifications of these two bank failures will be felt in the form of more bank regulation and tighter lending standards. 

This Friday’s Core PCE reading, the Fed’s favorite inflation gauge, came in at 0.3% or 3.6% annualized. While this is still far too high, it is encouraging. However, the Fed remains resolute in its battle against inflation. They maintain their higher-for-longer stance on short-term interest rates. Their intention is to continue raising rates while the economy is still growing, and unemployment is low, as they fight inflation. We are not sure if this is the right decision, but history has shown that inflation is difficult to break once it is entrenched in the overall economy. This leads us to think that the Fed will keep short-term interest rates elevated for longer than many on Wall Street anticipate. Should these rates continue to rise beyond Wall Street’s expectations, volatility in the bond and equity markets will likely revive later in the year. 

Most of the news on loan defaults and property impairments is centered around office properties. Single-family residential loans are on solid footing. While valuations on single-family homes have fallen, they have not fallen dramatically. Many homeowners have locked in low long-term mortgage rates, potentially mitigating the need to sell.  This will act as a floor to price declines. Spring activity in housing is encouraging. We believe the worst is behind us, as clients adjust to the higher rate environment. 

Market Commentary 3/3/2023

Posted on by Damon Germanides

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 7/22/2022

Posted on by Damon Germanides

Treasury Rates Decline As Corporate Earnings Disappoint

Inflation continues to deplete consumer spending power. This trend aligns with some very interesting reports from AT&T on the increase in late payments and rising defaults on smartphones. Since many of us can’t live without our smartphones for work or social interaction, failure to pay smartphone bills is concerning. It also suggests the economy may be worse off than many economists believed. Credit balances rise along with other loan types like non-performing auto loans and BNPL (buy now and pay later). The massive stimulus that was pumped into the market appears to have left the economy to work towards normalization while also battling high inflation and slowing growth. Many layoffs in the banking business are being announced. I expect unemployment to rise in the coming months as companies expand layoffs and banks pull back on lending. The recession is here, in my opinion. The big unknown is the Fed’s strategy to combat persistent inflation in a slowing economy. 

The Fed’s Big Squeeze

The haste with which the Fed has risen and may continue to raise short-term interest rates is squeezing all but the biggest banks. This squeeze is distressing for housing as banks pull back on LTVs, Cash-Out Refinances, and Investment Property Loans. Prices will need to adjust to the combination of higher interest rates and tighter bank guidelines. Mortgage banks that have filled the void on the more niche product offerings are also being affected. The one silver lining in all of this? There is a dramatic increase in housing inventory from very low levels of supply. There are many prospective buyers who have been waiting to buy for quite some time. Their time may be here in the upcoming months.

The ECB raised rates and now short-term interest rates are no longer zero. Personally, I never understand negative interest rates. As an observer, why would you lend money to get less of a return in the future?  As we witness this all in real-time, the winding down of easy money policies and as central banks experiment with negative interest rates, remember the old saying “it doesn’t make sense.”  Should inflation persist and the recession be deeper and longer than forecasted, central bankers in the developed world should remember the damage easy money policies have historically resulted in. While we all loved zero rates (or near zero or negative in some countries), the use of these policies is so destructive that it would be wiser to shelve them for future generations. Basic finance requires a discount rate to calculate risk properly. Ultra-low interest rates increase wealth and risk-taking, while rates remain low. The flip side is what happens when rates rise and inflation becomes unanchored, as we are experiencing today. Wealth is destroyed, confidence is eroded, and the most fragile in our society suffer through the high prices of basic necessities. Free money and zero interest rates have consequences. 

Mar-28-blog

Market Commentary 3/29/19

Posted on by Damon Germanides

Declining mortgage rates have spurred refinance activity, as well as increased the probability of a strong spring home buying season. With inflation in check and the Fed on pause, interest rates should remain attractive for the foreseeable future. However be on the alert as rates may have bottomed and hit resistance in moving lower after rallying greatly since the beginning of the year.

Fears of global economic activity slowing continue to weigh on bonds. The recent drop in rates has pushed several wealthy nations debt to trade at zero % or below. In the U.S., the 10-year Treasury bond briefly dropped below 2.4% this week and the 3 month to 10-year Treasury yields inverted, a potential ominous signal of a looming recession should the inversion hold. An inverting yield curve has predicted most recessions and the inversion is the result of fears of economic growth globally as well as a lack of inflation.  These fears will keep investors on their toes and may create a more volatile rate environment in the coming months.

Given that we believe most of the concerns we’ve mentioned are priced in, we are biased toward locking in rates at these very attractive levels. Any unexpected good news could move rates up higher quickly.

Mar-15-blog

Market Commentary 3/15/19

Posted on by Damon Germanides

Easing global monetary policy continues to provide the tailwinds pushing mortgage rates lower and equity prices higher. Recent confirmation from the February PPI and CPI also confirmed that inflation remains in check. As stocks have gained back most of the losses from late last year, risk is back in vogue. 

Reduced mortgage rates have arrived just in time to boost what has been a slowing new market for the new and resale housing market. Recent stories on the glut of high-end homes (those over $10 million) have brought back the conversation as to whether and when housing will reset much lower. Our view is that a glut is unlikely given the strict underwriting guidelines that banks continue to follow. If anything, the return of low-interest rates may ignite a better than expected spring buying season in housing.

However, fears remain in the highly leveraged first world economies, especially in the corporate and government debt markets.  As previously mentioned, QE has created absurdly low rates around the world and true price discovery is difficult to attain.  Geopolitical events such as China trade talks, Brexit, and Italian debt levels are also worrisome, as well as the slowing of the global economy.  Low rates work as a tonic in addressing these issues and central banks realize that.

With the 10-year Treasury dipping below 2.600%, locking is not a bad idea.  However, given where European and Japanese bonds are trading, rates in the U.S. may go lower.  Be careful what your wish for, as lower rates may mean trouble ahead.  For now, all looks to be OK and borrower appear to be taking advantage of renewed low rates for both purchases and refinance. We continue to be cautious and are biased on locking-in interest rates at these levels.

Mar-08-blog

Market Commentary 3/8/19

Posted on by Damon Germanides

The highly watched monthly non-farms payroll report was a bit of shocker at first blush with only 20k new jobs created in February versus economists’ estimates of 180k jobs.  However, other details within the jobs report were positive with the unemployment rate dropping to 3.8% and a decline in the U-6 number (total unemployed) falling to 7.3% from 8.1%, which was the largest decline ever.  The Labor Force Participation Rate (LFPR) remained unchanged at 63.2%.  We will await revisions on this month’s report to see if the new jobs created are revised higher. Our hunch is that there were more jobs created then stated in this report as evidenced by the bond market’s muted reaction to the report.  Stocks initially sold off but recovered most of the losses by day’s end. 

Other big news this week was concerns over Europe and China’s slowing economy and the ECB reinstating stimulus. We are concerned about how long the U.S. can expand its economy in the face of global economic deceleration. Global bond yields have fallen again, and the Fed has also stalled on normalizing monetary policy which has capped interest rates globally for the moment.  The fear is that with rates already so low (many bonds yield negative rates in Europe and Japan), central bankers have limited tools to in their toolkit to deploy should the world economy slow further.  Keep an eye on the flattening yield curve in the U.S., especially the short-term treasury bills to 10-year Treasury spread.  While a flattening yield curve does not mean a recession is near, an inversion of the yield curve is an ominous sign and has often properly predicted a recession. 

Not all of this gloom and doom is bad for the consumer, as low-interest rates have spurred home refinances and purchases of both commercial and residential real estate.  With home prices dipping a bit, it appears as if sales are starting to pick up into the spring buying season. 

Given that the 10-year Treasury yield is below 2.62%, we remain biased toward locking-in interest rates, especially on purchase transactions. 

Market Commentary 1/25/19

Market Commentary 1/25/19

Posted on by Damon Germanides

Government, investment grade, and mortgage rates remain low amidst uncertainty over the government shutdown, China trade negotiations, the Brexit outcome, and overall concern about a slowing global economy.   As stated previously, Wall Street likes gridlock so it is no surprise to see U.S. equities rise in the face of a government shut down.  Furthermore, the Fed has been fairly clear that we may be closer to the neutral rate of interest than previously thought, as well as slowing the reduction of the balance sheet which has been draining liquidity out of the financial system. These measures have served as a boon to equities.

Low rates have helped mortgage applications. Home sales have slowed which has forced some re-pricing that has benefited many who have waited for a break in the upward trend in housing prices.

With interest rates on the 10-year Treasury note under 2.800%, we remain cautious and are biased toward locking in interest rates at these levels.  Should the government open and should we see more positive discussions on the China trade negotiations, we believe rates may move higher and possibly, very quickly.

Jan-18-blog 2019

Market Commentary 1/18/19

Posted on by Damon Germanides

The effects of the partial government shutdown

Interest rates are drifting higher as the damage caused by last month’s brutal volatility washes out and the focus returns back to earnings, the economy, global trade, and inflation.  

We will learn more about earnings in the coming weeks, but it has been a mixed bag so far. With respect to the economy, the U.S. economy remains strong, but across the pond, Europe’s economy appears to be slowing along with China. The global economic slowdown is a big concern and is partly responsible for the drop in interest rates that took hold late last year and continued into 2019. Counteractively, a slowing economy could be good for stocks as it will keep the Fed from raising rates.  

Secondly, the effects of the government shutdown (if it continues), will become a drag on future confidence readings and overall GDP if it’s not resolved soon. However, keep in mind, Wall Street loves political gridlock and the surge in the stock market is evidence of this.

Thirdly, there are rumors that the U.S. and China are working together on a trade deal. Stocks are higher on this news and bonds have sold off a touch as the risk of an all-out trade war subside.

Finally, inflation remains in check even with full employment here in the U.S. This is a big positive for bond yields along with the Fed clearly stating their intention to remain patient.  

With the recent upward trend in stocks, and, the 10-year Treasury Bond trading below 2.80% yield, we remain biased toward locking-in interest rates given recent events.