What negative interest rates mean for real estate and investors

What negative interest rates mean for real estate investors
by Team Stessa, posted in Newsletter

Here’s how to stop a real estate investor dead in their tracks: negative interest rate mortgages. OK, you have my attention. Go on. In a widely reported move, Erik Sherman or Fortune reports on Danish Jyske Bank’s move to offer a ten-year fixed interest mortgage at -0.5%. So the question then becomes, what’s the catch?

Denmark’s third-largest bank is doing this for very practical reasons, as Sherman explains: “The ECB currently has depository interest rates at -0.4%…Denmark’s benchmark rate is currently -0.65% as a result, creating strategic problems for investors like pension funds that need to park money…Keep everything in stocks and other instruments and if markets turn south you might lack the cash to make necessary payments.” In short, larger institutional investors in that country see the mortgages as a better risk diversification strategy.

But that’s not all, Jacob Passy of MarketWatch reports that Nordea Bank in Denmark announced that it will offer a 20-year fixed-rate mortgage at zero interest, with upcoming loan programs offering up to 30 years with negative rates.

This can have several effects on investors here in the U.S.: As interest rates drop—and they have been here—it becomes more expensive for people to save money. Imagine having the privilege to put your hard-earned savings in a bank account earning -0.5%. Further, it may mean banks become more selective about who they loan money to, given the much lower yields.

From a global economic standpoint, David Lynch of The Washington Post (subscription required)eloquently notes that this “suggests that a fast-rising share of investors are so nervous about the future they’re willing to actually lose a little money by lending it to a borrower that is almost certain to pay it back, rather than risk betting on something that could go bust. In a healthy economy, investors would put their money to work in profit-making ventures such as factories or office buildings.”

Daniel Amerman commented this week on Seeking Alpha that in inflation-adjusted terms, we’ve already had negative interest rates here in the U.S.:

Inflation adjusted interest rates

Source: Seeking Alpha

National housing update

Since lower interest rates have little to do with housing markets—no, 2008 was a credit crisis!—and more to do with central bank policies and global economic health, the question then begs, how are we doing this time around with housing?

Lucia Mutikani of Reuters reports that “U.S. homebuilding fell for a third straight month in July amid a steep decline in the construction of multi-family housing units, but a jump in permits to a seven-month high offered hope for the struggling housing market.” Lower interest rates have not spurred development, and labor shortages continue to mire builders.

Jacob Passy of MarketWatch reported this week that “Construction on new houses fell 4% in July to the second-lowest rate this year, but builders applied for more permits in a positive sign for the housing market.”

Neil Dutta of Business Insider isn’t sounding the alarm bell, noting that pending home sales have increased to their highest level since 2017, and new-home sales—although bumpy in recent months—have risen 15% so far in 2019. Homebuying sentiment is also at record highs, with the Conference Board noting that new home purchase intentions “have exploded to levels not seen since before the financial crisis.”

Andrew LePage of CoreLogic offers some positive news, reporting that mortgage delinquency rates in May 2019 stood at 3.6%, down from 4.2% since May 2018. Further, foreclosure inventory is now at the lowest for the month of May in more than 20 years.

Mortgage delinquency rates are at record lows

Source: CoreLogic

Keith Jurow of MarketWatch offers some interesting insight for real estate investors: the main reason why housing prices have not already deflated is because of you! Investors have kept the housing market stable, and according to Jurow, “Unlike the speculative housing bubble of 2004-07, the investment surge over the past six years has been largely driven by a purchase-and-rent strategy,” rather than a flipping mentality which carries higher risks.

Sacramento’s rent control

Big news out of California this past week, with the Sacramento City council passing a hotly-debated rent control measure. Rachel Wulff of CBS Sacramento reports that the new Tenant Protection and Relief Act limits rent increases to no more than six percent each year plus inflation, with a cap at 10%. The new law does not apply to single-family homes.

Brandi Cummings of KCRA 3 reports that “Landlords subject to the ordinance pay an annual per unit fee to cover program administration costs.” Further, the law bans tenants from being evicted without notice if they’ve lived in the unit for more than a year.

Bob Moffitt of Capital Public Radio reports that very few people are happy with the new ordnance. “Many landlords opposed language in the act, which passed by a 7-to-1 vote. They were joined by low-income residents, who argued at the meeting that a 10 percent limit on annual rent hikes is not helpful.”

See full Ordinance Adding Chapter 5.156 to the Sacramento City Code Relating to Tenant Protection and Relief Act.