Tag: recession

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 11/4/2023

Posted on by Damon Germanides

Fed’s Commentary Eases Bond Market As Yields Fall

Both bond prices (yields move inversely to price) and equities moved higher this week. This event was spurred by what many believe to be the end of the Federal Reserve’s rate-hiking cycle. Unemployment and manufacturing data came in worse than expected. When coupled with the commentary on rising subprime auto delinquencies, signs indicate that consumers, especially those on the lower end, are reaching their financial limits. It’s hard to believe that less than two weeks ago, the markets were quite worried about the 10-year Treasury touching 5%. However, the all-important 5% threshold was breached but never did close above that critical level.

In this classic “bad news is good news” situation for both bonds and stocks, the markets have found comfort in the 10-year falling back down to around 4.5%. Assuming the 10-year stays at this level, and that mortgage term premiums shrink, it is not impossible to see mortgage rates in the mid-5s. This would be welcomed news for mortgage originators and real estate brokers alike.

It is important to note that the volatile moves in US government bonds are not healthy, which makes lending decisions quite difficult. Watching bonds move over 50 basis points in three days is rare and emblematic of the varying views on economic and geopolitical risks. The relaxation of bond yields suggests that traders were either expecting a much more hawkish Federal Chairman, that geopolitical risks are rising, or that the economy is deteriorating, as supported by the fall in oil prices.

While the world is in a heightened state of anxiety, lower rates have the potential to encourage risk-taking, refinances for real estate and businesses, as well as a renewal in purchases of big-ticket items like homes, autos, and machinery. The real estate market was frozen when conforming loans touched nearly 8% late last month, as lenders feared the 10-year would quickly run well above 5%. That risk has been significantly reduced by this week’s action in the bond market, and we are happy to report this positive development.

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 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 6.9.2023

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 5/12/2023

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.

Market Commentary 5/5/2023

Posted on by Damon Germanides

Equities Surge Amidst Better Than Expected April Jobs Report 

Equities surged on Friday following the release of a better-than-feared April Jobs Report, calming worries of an imminent recession. Troubled regional banks rallied by over 70% in some cases, even as bond yields rose. Nonetheless, any optimism surrounding the regional banks may be short-lived as more bank failures are expected. This is due to the Federal Reserve’s decision to keep short-term interest rates higher for longer, which will put pressure on all but America’s biggest banks to raise deposit rates and scale back lending.

As borrowers realize that a 5%+ short-term U.S. Treasury bill is a much better return than keeping money in their bank, we’re seeing a movement of money out of banks designed to slow economic growth and cool off demand. The question remains: how long of a lag does Fed policy come with? Some on Wall Street believe that inflation and interest rates will fall dramatically within the coming months. We take the more conservative view that it will take a longer time for interest rates to decline and inflation to move back down to 2.00%. We don’t see the need to raise interest rates further, but we are taking the Fed at its word that rates will remain elevated for longer.

State of the Mortgage Market

Despite the challenging market conditions, the mortgage market is functioning well. We’re creating many new relationships with lenders we’ve not pursued doing business with or known of until recently. Here’s a sampling of some interesting products on active deals we’re working on in both the residential and commercial space (yes, Insignia Mortgage does commercial loans too!):

  • Single-family home loans of up to $4MM at 80% loan-to-value with rates in the mid-5s for ARM loans
  • Single-family home loans of up to $30MM at 70% loan-to-value with rates under 5% with a banking relationship
  • Owner-occupied commercial loans of up to $10MM with rates in the mid-5s
  • Multi-family apartment loans of up to $15MM with rates in the mid-5s

Market Commentary 4/28/2023

Posted on by Damon Germanides

Economy Resilient As Fed Week Approaches 

The Fed’s preferred inflation gauge came in as expected. Inflation remains high despite showing signs of moderating, with the Fed planning to raise rates next week (on top of rumors of an additional hike in June). The rationale behind higher short-term interest rates is the economy is performing better than anticipated. Q1 earnings met the projected results, with consumer sentiment and PMI data being positive. Some parts of the country are even experiencing bidding wars on home sales. 

There are signs that indicate the next few months could be challenging. GDP growth is anemic. Some CEOs, including Amazon’s CEO, have spoken about slowing business spending in preparation for a downturn. The rally in the market has been led by a few large companies, as commercial real estate valuations remain uncertain and in decline, which could be problematic for banks. Overall, bank lending standards continue to tighten, creating opportunities for lenders with more expensive terms and rates. 

Supply & Demand, Homeowners & Mortgage Rates 

Housing supply remains a challenge, particularly in cities like Los Angeles. A decade of low rates allowed borrowers to secure manageable mortgage payments. Now that interest rates have doubled, homeowners may be deterred from wanting to sell because of the high mortgage rates relative to recent years, causing a strain on supply and putting a floor on housing values. The possibility of a recession could affect all asset classes at some point, but for now, home buyers must accept higher mortgage payments and prices. 

Next week will be critical, with the FOMC meeting and conference call on Wednesday, followed by the April Jobs Report on Friday. These events could significantly impact the equity and bond markets. 

Market Commentary 4/21/2023

Posted on by Damon Germanides

Mortgage Rates Hold Steady

Markets were calm this week as initial worries over bank earnings and balance sheets were better than anticipated. Bank of America’s CEO, Brian Moynihan, provided comfort to the market with his commentary on the consumer, the state of the banks, and his explanation of why money is moving out of the banking system to higher-yielding and safe instruments such as Treasuries. In short, the outflow of money from banks is what the Fed wants to see. In our highly leveraged economy, money flowing from the banking system will tighten the amount of available credit and require banks to offer more yield to keep depositors. This keeps interest rates on mortgages elevated. As a result, there is less money in the economy, which should slow demand and help cool off inflation. It sounds simple, but the twist comes with timing. Fed policy works with long and variable lags, so any policy initiated many months ago may only now be impacting the economy. That is why many are calling for a pause to rate hikes to see what may come from the jumbo move in short-term rates over the last year. However, betting markets believe the Fed will raise rates another .25 basis points in May as Fed officials continue to advocate for further tightening in its inflation fight. With service inflation remaining sticky and business activity picking up, we too believe the Fed will go for one more hike.

Nevertheless, there are many mixed signals that suggest the economy is cooling. Auto sales and housing have certainly slowed (yet builder stocks are near all-time highs, go figure). While loan defaults across commercial, auto, and consumer credit remain low, default rates are rising, as are spreads. The MOVE index, a measure of bond volatility, is very high, which is never a good sign. Weekly jobless claims point to more layoffs ahead. Let’s not lose sight that a strong sign of a looming recession remains with the inverted yield curve. In addition, banks are limiting the lending box in anticipation of a slowing economy, lack of deposit growth, and in response to the SVB and Signature Bank failures.

Smaller Lenders Are Better

As big banks tighten the lending box on residential mortgages, Insignia Mortgage is locating eager to lend sources like smaller banks and credit unions.  We recently partnered with a local, federally-insured institution, with an old-fashioned way of doing business. This lender looks at each scenario case by case and then makes a decision. Interest rates are in the low 5’s for a 5/1 ARM, and this particular lender will offer a loan amount of up to $4 million dollars at 80% of appraised value. No banking relationship is required. We like these lenders because they are community-oriented and far easier to deal with than the bigger banks. Their interests are aligned with ours and most especially, our clients. Every deal matters to these smaller lenders fighting for market share against the bigger banks.