April 2021

Loans May Be Easier To Qualify For As Mortgage Rates Rise – Housing Market Review

Rising mortgage rates since the beginning of the year have slowed mortgage applications down. Should employment conditions improve allowing more to qualify for loans, then there could be a resurgence in refis and purchases for those that didn’t qualify last year. In addition, some lenders are expected to relax standards as volume declines, easing the loan qualification process. Optimistically, rates are still historically low relative to the 50-year average for 30-year fixed mortgage loans of 7.88%.

Fannie Mae is forecasting that mortgage companies are projected to originate 13% fewer home loans than last years’ record of $4.5 trillion in loans. Both refi and purchase volume are forecast to drop this year.

Even though rates have been rising, many homeowners may still benefit from a refinanced loan since rates are still well below their 50-year average. In addition, limited housing inventory has brought about demand for new construction in various parts of the country, creating new home purchase loans. New home construction, as measured by Housing Starts data tracked by the Federal Reserve, show that new home construction has started to rebound from the lows of the pandemic, ensuing in new home loans.

Sources: Mortgage Bankers Association, Fannie Mae

How Government Inflation Gauges Differ – Macro Economic Dynamics

The traditional gauge for inflation, known as the Consumer Price Index (CPI), is being challenged by yet another government produced measure known as Consumer Expectations. The most recent data released shows an inflation rate of 1.7%, as noted by the CPI compiled by the Bureau of Economic Analysis for February 2021. The Federal Reserve maintains its own inflation gauge, yet is based on consumer expectations of where inflation is headed. That inflation gauge ended February at 3.09%.

Many economists believe the Fed’s inflation gauge to be a more accurate indicator of actual inflation since it is directly based on consumer expectations. The traditional CPI extracts food and energy, ironically two of the most inflationary areas for consumers this past year.

Some of the items included in the CPI basket are housing, clothing, transportation, medical care, and education. The challenge of the CPI is that it takes a look-back approach rather than a look-forward approach which takes consumer expectations into account. Expectations also vary among age groups, where seniors are more concerned about medical care and transportation, while younger adults worry about apparel and housing.

Sources: BEA, Federal Reserve

Where Anticipated Tax Hikes May Hit – Tax Planning

While the three stimulus programs amount to over $4.5 trillion were mostly funded by government debt, the recently introduced $2.25 trillion infrastructure plan will be primarily funded by tax increases. Preliminary indications are that the anticipated tax hikes will target both corporations and high earning individuals. The tax increases may be the largest since 1993. The following are among the proposals currently being considered:

Raising the corporate tax rate to 28% from 21%;

Reducing tax preferences for pass-through entities, such as LLCs, S-Corps & Partnerships;

Tax increases for individuals earning more than $400,000;

Expanding estate taxes;

Higher capital gains tax rate for individuals earning $1 million or more.

The lingering concern is that individual tax payers that are small business owners may end up paying higher taxes even if their incomes are below $400,000. This could occur if the existing 20% pass-through tax deduction is eliminated or altered, essentially affecting about 95% of all businesses in the United States.

Sources: Taxpolicycenter.org

Yields Continue To Move Upward – Fixed Income Update

Yields rose across all fixed income sectors, with the 10-year Treasury yield reaching 1.74% as of March 31st, the highest level since January 2020. The onslaught of rising yields has been in conjunction with heightened inflationary pressures.

Some analysts and economists believe that interest rates will rise more slowly in response to inflation, allowing for gradually elevating bond yields. Higher bond yields have historically led to higher loan rates from mortgages to credit cards.

Sources: U.S. Treasury, Bloomberg

Higher Yielding Bond Alternatives  – International Fixed Income

Main reasons why China Bonds are currently attractive:

Extra yield—In today’s environment with many of the major economies operating in zero or close to zero interest rates, China is one of the few major economies that still offer yields significantly above zero.

Diversification—Chinese bond market returns have low correlation with other asset classes, making it very useful as an diversification asset in our view.

Relatively low currency volatility—The renminbi offers significantly lower volatility than currencies of other major economies making the volatility-adjusted unhedged total return attractive.

Source: MatthewsAsia Fund Management