We all heard the news last week about the Federal Reserve dropping their benchmark interest rate by 0.5%, with CNN reporting that the Fed just hit the coronavirus panic button. This was the first emergency—as well as the biggest—cut since 2008, with the new benchmark interest rate at a range of 1% and 1.25%.
Thomas Franck and Yun Li of CNBC highlight the uncharted waters we are currently swimming, with oil prices and stocks tanking, a run to bonds has already occurred. “The yield on the benchmark U.S. 10-year Treasury briefly touched an all-time low of 0.318% in overnight trading, adding another 30 basis points to an unprecedented fall in the key interest rate.”
Simply put, mortgage rates are tied to bond yields, which drop as investors flee to them from riskier assets, such as the stock market. Bond yields drop—particularly the 10-year treasury—then so do mortgage rates. Keep an eye on bonds.
Gina Heeb of Markets Insider reports that as COVID-19 increases in the world’s top economy, Wall Street is betting on more pain ahead. “Interest-rates futures traders are pricing in a roughly 51% probability that interest rates will hit the zero lower bound by April,” according to the CME Group.
For real estate investors, it could be a great time to take a holistic look at your portfolio and consider all your options. Don’t panic, plan.
Not everyone is happy. We do have a strong economy and record low unemployment. A senior Vanguard economist is quoted in RIA Biz as having serious doubts about whether the Fed decision is prudent. “We believe the announcement by the Fed today to cut interest rates was premature given the lack of data suggesting a significant drag on the economy…The high uncertainty around the potential implications of the coronavirus warrant further assessment before taking action of such magnitude.”
Further, Orla McCaffrey and Ben Eisen of the Wall Street Journal (subscription required) noted that despite rates being at record lows, the fear of COVID-19 will possibly deter buyers both domestic and foreign, particularly given the extreme uncertainty leveled by the recent oil and stock market drops.
Jeff Tucker, an economist at Zillow, is quoted in Bloomberg as noting that given the recent drop in bond yields, mortgages will possibly soon catch up, and that “Given such low 10-year yield, we would expect 30-year mortgage rates to drop even lower than they are today.”
Ben Lane of Housing Wire provides some interesting insight, noting that mortgage rates may hold off due to capacity issues from lenders. There is still a large differential between the 10-year treasury and average mortgage rates, “because it appears that some lenders are trying to protect themselves from being crushed by demand.”
Well, that hasn’t stopped multifamily investors from rushing to refinance properties, according to Tina Daunt of The Real Deal. “This week at a CRE Finance Council conference in New York City, agency lenders reported receiving more than $7 billion loan quote applications last week — double the normal weekly amount.” And, 90% of the loan requests are fixed-rate, and about two-thirds are refinance applications.
And multi-family investors are expected to have a booming 2020, according to Pro Builder citing RealPage data. “In 2020, the multifamily market is expected to set a 30-year record for new supply in the top 150 apartment markets. Builders will add a projected 370,000 units nationally this year…Experts forecast that both large and small markets will have a stellar year even amid the ongoing labor shortage.”
Julia Falcon of Housing Wire reports on the same RealPage data, noting that “Out of the seven smaller markets expected to see a spike in new supply, four of them are in Florida: Palm Bay; Deltona-Daytona Beach; North Port-Sarasota-Bradenton and Cape Coral-Fort Myers…Wilmington, North Carolina will also see a sizable amount of units arriving this year.
If this wasn’t a good enough indicator for investors in this asset class, demographic trends appear to be on their side as well, with two interesting articles this week of note: Why Demographic Trends Support Continued Multifamily Growth in Forbes, and Renter-by-Choice Population Boosts Multifamily Investor Confidence in Globe St.
#LocalNews: COVID-19 effect on San Jose, NYC, and Seattle
Some noteworthy #LocalNews this week in real estate, starting with San Jose, with Maggie Angst of The Mercury News reporting on the 24 confirmed cases of COVID-19 in Santa Clara Country. This has reportedly led to San Jose Mayor Sam Liccardo proposing a moratorium on the “evictions of residents facing significant financial burdens” due to the virus. “If approved by a majority of council members on Tuesday, the temporary moratorium would be in effect for at least 30 days and would protect residents who can document that they cannot pay rent due to a substantial loss of income related to the virus.”
As a quick aside, Adam Brinklow of Curbed San Francisco also reports on Realtor.com data showing that San Jose is “the single most difficult place to buy a home in the United States.”
In New York City, Michael Kolomatsky of The New York Times (subscription required) reports that the number of multifamily transactions in the city fell by about 33%, with many pointing to the effects of rent control on the resale market. And COVID-19 will certainly not help.
Caroline Spivak of Curbed New York reports on the pain of the local real estate industry in NYC as a result of COVID-19—and the recent stock market crash. “New York City’s real estate and construction worlds are bracing for project delays and rising costs of materials as Chinese manufactures and shipping slows to crawl”
Finally, Dima Williams of Forbes reports on Redfin CEO Glenn Kelman setting the stage for trouble in the Seattle real estate market: “In Seattle, the [COVID-19] reaction has been strongest among sellers, who worry about strangers entering their homes; this only started on Monday [March 2] morning.”