Mar-28-blog

Market Commentary 3/29/19

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

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

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

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

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.   

Dec-28-blog

Market Commentary 12/28/18

After a gloomy start to the week, U.S. equities rallied significantly to the delight of traders and investors. While the equity markets are poised to close lower for the year, a strong rally on the day after Christmas stock rally and a follow up positive close took some risk off the table with respect to if “Mr. Market knew something the rest of us didn’t”. Part of the recent volatility can be attributed to year-end tax selling, but the violent moves appear to be the result computer-driven algorithmic trading. Volatility is usually a benefit to bonds, and given the strong economic data and low unemployment rates throughout the year, we are glad to report the 10-year Treasury is well under 2.82%. Around the developed world, interest rates remain accommodative as both China’s and Europe’s economy show signs of slowing. Whether or not a recession is on the horizon is debatable, but low rates appear to be needed to keep the global economy moving forward.

With inflation in check, a volatile stock market, the threat of ongoing trade tensions with China, as well as a partial government shutdown, we see interest rates remaining low for the first few months of the year. This reprieve in interest rates should be a boon for home buyers who were worried about rising interest rates and a slowing housing market. Banks are fighting hard for home loans and we look forward to helping our borrowers and referral partners in the coming year find the best loan they can.

Alt-A Loans Get New Respect

ALT-A-loansAs a mortgage broker specializing in complex jumbo loans in California, I read with interest the article from the  Wall Street Journal on “Alt-A” loans (Remember ‘Liar Loans’? Wall Street Pushes a Twist on the Crisis-Era Mortgage, February 2, 2016). I took this as a sign of encouragement for the many self-employed borrowers with sporadic income, or less than perfect credit.

These borrowers have had little success obtaining financing from large banks, even when putting down payments of over 40%! Today’s “non-qualified mortgages” do not resemble the “liar loans” of the past. These days, both borrowers and lenders must invest more effort analyzing complicated loan terms that are structured to compensate for factors such as unpredictable income, or lower credit scores.

We at Insignia Mortgage have built strong relationships with regional California-based lenders who will underwrite these types of loans, often offering very favorable interest rates (example: 5-year fixed 3.218% to 3.718% APR). This WSJ article reinforces the ideas that investors are starting to realize these loans are not all bad. Wall Street certainly seems to be warming up to these loans.