The stock market has been on a wild ride comprised mostly of downhill plunges thanks to the pandemic threat of the coronavirus, also known as COVID-19, the disease that’s caused by the SARS-CoV-2 virus.
The SARS virus outbreak that occurred from November 2002 to July 2003, which also started in China, eventually infected over 8,000 people, killed 774 people, and spread to 17 countries. By comparison, COVID-19 so far has infected over 94,000 people and killed more than 3,000.
To calm roiled markets, oil producers have cut production and the World Bank has pledged monetary support to poorer nations affected by the disease. This week, Sam Khater, Freddie Mac’s chief economist, reported that, “The average 30-year fixed-rate mortgage hit a record 3.29% this week, the lowest level in its nearly 50-year history.” So why is all the bad news turning into good news for prospective home buyers? It’s all tied to the 10-year Treasury bond yield.
When consumer confidence is high, the price for bonds drops. When consumer confidence is low—for instance, during a pandemic—the price of Treasury bonds go up and yields drop. Because they are backed by the U.S. government, bonds are considered a safe haven for investment.
Mortgage rates tend to work in reverse of Treasury bonds, as the bond market and the real estate market compete for investors. Lower mortgage rates are used to lure in home buyers or homeowners who might be thinking about refinancing.
The other thing that’s happening is the effect of Chinese nationals investing in U.S. real estate. According to realtor.com, “Chinese investors have been the top purchasers of American residential real estate by dollar volume for seven consecutive years. From April 2018 through March 2019 alone, Chinese buyers flexed their purchasing power by snapping up an estimated $13.4 billion worth of residential property.”
Low interest rates will help keep foreign investors interested during uncertain times. As quoted in Forbes, Danielle Hale, chief economist at realtor.com, says, “Chinese buyers have faced headwinds in recent years from capital controls in addition to the general headwinds of rising home prices. The epidemic is likely to hamper their ability to participate in U.S. real estate in the short run, but it may lead to more interest in the long run as buyers may seek to be more internationally diversified.”
But risk is the key word in the interest of keeping rates low and transactions flowing. Greg McBride, chief financial analyst for Bankrate.com, says, “Coronavirus fears are hitting financial markets, driving stock prices lower and bond yields to record lows as investors stampede to safety.” Lower interest rates are a way to compensate investors for buying in during times of higher risk.
Robert Dietz, chief economist at NAHB, predicted the Fed’s response to the crisis with an eye on the busy spring construction season ahead. “The Federal Reserve is targeting the interest rates and is prepared to act if there’s a fallback, for example, in consumer spending that could soften the economy, and make interest rate cuts sooner rather than later. The start of year forecast was for one rate cut, we saw the economy still growing but at a slower rate of growth for a period of time. So we’re going to watch the government agencies and the infrastructure of public health—that’s really the true test here.”
The Federal Reserve responded on cue this week by cutting the federal funds rate by 50 basis points to a range of 1% to 1.25%. The future of public health appears uncertain, but the building season is looking positive.
