Thousands of Douglas Elliman agents gathered at the Ellie awards at Mohegan Sun on March 3rd and 4th, but because of the Coronavirus, people there weren’t always sure how to greet one another. We saw elbow bumps and air kisses and even a few old-fashioned hand shakers who threw caution to the wind.
Back in the real world, talk of a pandemic had shaken the S&P and the Dow. The Fed issued an emergency rate cut to try to slow the bleeding. It all sounds really bad for the economy.
But what does it mean for real estate?
At a cocktail party back at the casino, we scrolled for a minute through social media and noticed a post from a fellow agent that said, “Guess what investment hasn’t dropped 10% this week??? Real estate”
The message was succinct and factually correct, and at the same time it served as a thinly veiled, passive-aggressive swipe at the stock market. And, with one simple question and one clear answer, the post also identified real estate as the healthy alternative to a stock market growing sicker by the day from the virus and the quickly spreading fear it conjures.
Not so coincidentally, the messenger happens to sell real estate, the elixir for all those ailing portfolios. Delivering a message like that is a slippery slope dripping with questions of morality.
One interpretation sounds like this: “It’s okay to benefit through the misfortune of others, even if it’s while thousands of people are sick and at risk.”
Another interpretation sounds like this: “People who have earned money want to protect it and build upon it. So, they park that money in different investment vehicles hoping to watch it grow. Historically, certain events or situations have made some of those investment vehicles temporarily less safe. In just a few days, fear of the Coronavirus made the stock market a temporarily less safe investment vehicle. That didn’t happen to real estate. You should consider parking your money there. Oh, by the way, I know all the best parking spaces.”
The poisonous word in the first interpretation is benefit. The implication is that people who move their assets from one space to another are profiting from the Coronavirus while some are dying, and more and more are growing sick. We believe that most people are less diabolical than that. Most are not focused on benefitting from crisis, rather their knee-jerk reaction is to protect what they’ve earned while we’re in the midst of it. If that theory is accepted, then that first interpretation has lost some of its toxicity.
But what of the messenger?
Is the agent who posted the message being opportunistic in a less than flattering way?
We say there should be no shame in living up to a professional standard.
It is quite literally the job of a professional real estate agent to identify opportunities for their clients to buy or sell property. If they cannot do that, they will not survive in their chosen profession.
What Impact Have We Seen Already?
During the first week of March, the Coronavirus unleashed a campaign of shock and awe against the stock market. The real estate market is always much slower to react. Values don’t plummet overnight, so comparatively, New York City property values have been relatively immune to Coronavirus. In other words, real estate just became a lot more attractive than Wall Street.
And while the Coronavirus hasn’t caused a noticeable difference in the price of a New York City apartment, buying one has become a hell of a lot less expensive because interest rates are as low as we’ve ever seen!
- A $500,000 loan costs $307 per month less this year compared to last.
- A $750,000 loan costs $461 per month less this year compared to last.
- A $1 Million loan costs $615 per month less this year compared to last.
- A $2 Million loan costs $1229 per month less this year compared to last.
So, if you are taking money out of the market, why not move your investment into real estate? There’s still a ton of inventory putting pressure on developers to price as sharply as their competition. Leveraging the bank is cheaper than ever. You can earn dividends through rental income. And, if history counts for anything, the long-term outlook for New York City real estate is glorious.
The Rate Cut Misconception
The Federal Reserve cut the federal funds rate on March 3rd by .5% to a range of 1% – 1.25%. It was the first unscheduled emergency rate cut since 2008, when the Fed intervened in the aftermath of the Lehman Brothers collapse.
When we talked with loan officers about the most recent cut, most of them rolled their eyes because they’d already started getting barraged by clients who assumed that mortgage rates had dropped by ½ percent. People hear the word rate and their brain automatically gravitates to mortgage rates. In fact, when you read news articles online about the topic, the page typically has at least one advertisement for mortgages, a likely attempt to capitalize on the misnomer.
The federal funds rate is the rate that lending institutions charge when they lend to one another on an overnight basis in order to maintain balances required by the Federal Reserve. The Fed doesn’t arbitrarily cut mortgage rates across the board in one fell swoop. That is not to say that there isn’t an indirect effect on mortgages.
Traditionally, mortgage rates mirror the yields on the 10-year Treasury bond. When yields get lower, mortgage rates get lower. So, what indirect impact might the action taken by the Fed have on mortgage rates?
When investors are confident in the stock market, they’re not playing it safe by parking their investment in bonds. So, bond yields get higher in an attempt to attract those investors. But if a situation like the Coronavirus creates uncertainty in the market, investors turn to bonds and the higher demand for them would lower their yield, and in turn we’ve seen mortgage rates fall as they often do.
Over the years, market reaction has been inconsistent in the aftermath of a rate cut by the Fed. It is widely assumed that we’ll see another when they meet on March 18th and perhaps again in April. We should expect to see these low mortgage rates during this time of uncertainty.