Tag Archives for " stock market "

Coronavirus vs Interest Rates

coronavirus

It started in early March when, in the midst of the COVID-19 pandemic, Saudi Arabia and Russia initiated an oil price war – tumbling prices by 34% (down to $31.73 per barrel). Today this price war continues, with crude at only $20.71 per barrel. The pandemic and oil price combination has sent the stock market into a tailspin. With equity investors continuing their flight to safe-haven holdings, the DJIA has dropped almost 30% from the Feb. 12 high of 29,551.

Although 10-Year Treasuries (the rate that typically sets the direction of fixed mortgage rates) have averaged 2.27% over the past 5 years, a record low 0.318% 10-Year yield was recently reached.

But if mortgage rates usually reduce when investors flee the stock market, why did 30-year fixed mortgage rates increase from 3.15% to as high as 4.15% during this commotion???

For several reasons due to huge uncertainty, volatility and panic – all of which increased costs to lenders… which in turn were passed on to borrowers in the form of higher mortgage rates:

  • Profits to mortgage servicing companies (who manage borrowers’ monthly payments and escrows for lenders) reduced after many mortgages were repaid/refinanced early – i.e., servicing fees to lenders increased due to uncertainty regarding underlying value and content of their serviced mortgage portfolios
  • Pools of residential mortgages (mortgage-backed securities/MBS’s) became difficult to value given the higher probability of default or forbearance – so some investors are paying less to (or have stopped buying from) the lenders who are selling mortgages
  • Lenders, who promised rate locks to borrowers and sell their loans to investors after closing, are having to pay higher fees to hedge against rising rates (to protect loan value), and are subjected to margin calls when the value of their collateral reduces from Federal Reserve Treasury Bond purchases

Here's the Point: In a market with unprecedented volatility, there are several reasons why mortgage rates actually go in a direction opposite to what you might expect.

Don’t Put All Your Eggs in the Stock Market Basket

basket(Thanks for putting up with my Easter pun.)  As a real estate investor, it’s time for a “feel good” reminder:

Commercial Real Estate (CRE) represents an attractive asset class.

Here are a few of the obvious reasons for some reinforcement:

Inflation Protection (with contractual rent increases, CRE can offer the perfect inflationary hedge

Long-Term Capital Appreciation (according to the National Council of Real Estate Investment Fiduciaries or NCREIF, CRE returns have outperformed the S&P 500 since the late 1970’s – ignoring the correction of property values in 2008-09)

Low Return Volatility (CRE can lead to more predictable, recurring cash flows – especially well-located properties having a stable roll-over schedule of creditworthy tenants on longer-term leases)

Diversification (CRE returns generally have a low correlation to stock and bond returns)

And for those of you who just can’t stay out of the stock market… Although 2013 was an exceptional year for the S&P 500 (32.7% return), equity REIT’s in 2014 are likely to outperform last year’s abysmal 2.7% return.  The threat of interest rate increases weighed heavily on the REIT sector in 2013, but these returns should improve with the focus now leaning on company earnings – which should lead to additional demand for space in markets with limited supply.

Here’s the Point: Over the long term, commercial real estate has proven to be a great inflation hedge and has provided low return volatility, diversification, and long-term capital appreciation.