Where is our economy headed?
The month of October began with new highs for the stock market, bond yields moving up, and investors optimistic about continued growth for the U.S. economy. With the spike up in in bond yields, mortgage rates hit a 7 ½ year high, closing in on 5% 30-year average fixed rates. While this is still great historically-speaking, it is quite a jump from the sub-4% rates we have seen for much of the 2013-2017 period.
Just when economists and the media were so sure of continued expansion, a vibrant stock market, and higher rates for years to come, the DJIA loses 1300 points in two days last week! How could this possibly happen? The answer is “very easily.”
Looking at stock and real estate markets from a technical perspective, we have seen seven straight years of solid growth. It is quite evident that investors are talking on more risk in an effort to gain more yield on their investments. While it is not debatable an economic expansion has occurred these past seven years, it is crucial to look at how the growth has occurred. Much of this growth has been engineered, by the Fed buyback program, which had the effect of keeping rates artificially low, by the lessening of business regulations, and by the tax overhaul legislation. While I think these steps have been largely positive for the economy, the growth that has occurred is more of a manufactured than organic growth, which will have a shelf life that will eventually end.
It is always hard to predict the drivers of what will steer our macroeconomy, but between rising rates, tariff wars, geopolitical tensions, and imbalance between our economy and the rest of the world, there is a decent likelihood that some or all of these events will trigger a recession in the not too distant future. I know not very popular rhetoric, but better to be prepared than taken off guard.
The good news for real estate is the market is vastly different than it was in 2007 when the last housing crisis hit. The fact that for the past decade, there have been no true stated income loans (in other words, all buyers obtaining mortgages had to actually document their income!) should provide stability to the market when a downturn eventually hits. Rising prices and rates seem to have finally factored into the psyche of would-be buyers. It seems we have reached an inflection point, whereby the market is in a more neutral position from the strong seller’s market that we were in for the past several years. There is more inventory in most places vs. a year ago and buyers are starting to be more selective, all very positive signs!
Mortgage Program Spotlight
Where true stated income loans disappeared a decade ago, over the past few years, a new mortgage niche industry has popped up in its wake, what we term “non-QM” (Qualified Mortgage) loans. QM is a designation the Fed government came out with signifying certain mortgage characteristics existed whereby they would essentially back the loan, basically the entire conventional market. With non-QM, all of these characteristics may not be present, but the lender must still adhere to the Federal ATR (“ability to repay”) rules. With these rules, the lender still has to “document” the borrower has the means to repay the loan. The biggest category of non-QM loans are bank statement loans, whereby deposits are used for income calculations and tax returns are not required. With non-QM loans, a borrower may have a deficiency in one mortgage characteristic (income, assets, credit history, reserves) and still obtain a loan.
With the expansion of the non-QM market, we can qualify many more buyers with these niche programs:
Bank Statement Programs (personal or business)
95% LTV up to $1.5 million with no MI
Investment property cash flow loans (no income verification)
One day out of Foreclosure, short sale, deed in lieu, and bankruptcy (Ch. 7,11, 13)
Unlike “A” paper whereby underwriting is very uniform, you see a lot more variability with non-QM underwriting guidelines. In comparing pricing recently, we have a very aggressively-priced investor, who not only tops the non-QM space, but also is currently very comparable to the best “A” paper rates.
Whatever your real estate and mortgage needs may be, we look forward to serving you!