In recent weeks, news of the rapid global spread of the novel coronavirus COVID-19 has dominated conversations, news cycles, social media and global economic markets. But what does COVID-19 have to do with real estate? Well, considering that mortgage rates fell last week to the lowest rates we've seen since 2012, it's clear that fears surrounding the virus have a direct impact on real estate and real estate investments. When rates tumble, the real estate market feels it.
Why did rates take a huge tumble last week? Mortgage rates take cues from U.S. Treasury yields. Last week the massive decline observed with stock markets is a result of the fear that the virus will impede global economic growth, thereby pushing investors toward "safe-haven" or less-risky investments. The slow in global economic activity and the reduced outlook for inflation, due to the unknowns with regard to forecasting the economic impact of the coronavirus, have been favorable for relatively safer investments, like mortgage-backed securities. As such, resulting in large rate drops, with a 30-year fixed rate at 3.23% on Feb. 28.
What does this mean for buyers, sellers and property owners? For current property owners, the substantial drop in rates could mean a great time to refinance a current mortgage into a lower monthly payment, particularly if the current mortgage rate is north of the 4% mark.
These types of interest rates we saw last week, and should continue to see in the near future, are a buyer's dream. The lower the interest rate, the more purchasing power a buyer has. For example, with every percentage point the interest rate increases, it decreases purchasing power by 10%. Another way to put it is, on a loan of $100,000 when the interest rates are at 3.25% the buyer's purchasing power increases to $110,000. This essentially opens up the buyer's ability to increase their budget and allows a buyer to have an opportunity to afford a higher purchase price when rates are low.
What does the drop in interest rates mean for sellers? When rates are low, we typically see an uptick and influx of buyers in the marketplace. The influx of buyers results in a more active market. As such, active and competitive markets tend to yield higher purchase/sales prices, fewer days on market and more competitive offers.
While most markets have been jolted from the fear generated by COVID-19 and the uncertainty of what lies ahead, the result is the real estate market will experience something different than what we are experiencing on Wall Street. It's difficult to forecast how long rates will stay this low. What we do know is that sharp declines in mortgage interest rates result in active and competitive real estate markets.
Real estate is known to be one of the most stable long-term investments one can make. As a real estate professional, it's my opinion that buyers take advantage of the low interest rates and use the increase in purchasing power. This is also a great time for investors, as the ability to borrow money has become far less expensive. Lower mortgage rates mean lower payments and more opportunities for cash flow on rentals rented at a market rate. All in all, with the fear and uncertainty surrounded the impact of COVID-19, the mortgage rates and real estate markets seem to be a rare source of good news in the U.S. economy.