[REN #853] Real Estate Investing: Coronavirus Could Push Mortgage Rates Lower

Real Estate Investing: Coronavirus Could Push Mortgage Rates Lower, Real Estate News for Investors Podcast Episode #853

Concern about the Wuhan coronavirus is pushing mortgage rates lower. That may seem like a weird cause and effect relationship, but there is a good reason for it.

The latest rates for a 30-year mortgage have fallen to their second-lowest level in three years. Freddie Mac reported last week that the average 30-year fixed-rate mortgage was 3.51% and the 15-year fixed-rate mortgage was down to 3%. (1) That’s for the week ending January 20th. If you compare it to the average for that same mortgage in January of last year, it’s almost 1% lower. And some economists expect rates to fall further as the coronavirus spreads.

The coronavirus isn’t responsible for the entire drop in rates, but it is putting new pressure on them because of the bond market. When investors are nervous that something like this virus could affect the stock market and the economy, in general, they flock to lower-risk investments like bonds.

There are many kinds of bonds, but the 10, 20, and 30-year Treasurys are among the safest, and those are the ones that compete with fixed-rate mortgages for investor dollars. When the demand surges for bonds, the yields drop, and then banks must also lower their mortgage rates to attract investors.

How Treasurys Affect Mortgage Rates

The risk level for mortgages is slightly higher than bonds, so they usually run a few points higher than bonds. The Balance attributes the lower bond risk to several factors including the fact that they are loans by bigger organizations like cities and large companies, so they are more likely to be paid back. (2) Mortgages are paid back by individuals. Bonds are also rated by bond rating agencies and are backed by the U.S. government. As the Balance explains, the 10-year Treasury usually competes with the 15-year fixed-rate mortgage while the 30-year Treasury competes with the 30-year fixed-rate mortgage.

It’s impossible to predict the impact of the coronavirus. If it gets much worse, we could see more money going into Treasurys, which will result in a lower yield, and a corresponding drop in the fixed-rate mortgage. Bonds only impact the fixed-rate loan. Adjustable rate loans are tied to short-term lending rates.

Moody’s Analytics chief economist, Mark Zandi, says of the virus, “This is another hit to the U.S. economy. It’s just a question of how big.” He also says, “Money is going to start flowing into the U.S. bond markets even more than it already has.” That’s because investors around the world see U.S. bond markets as a “safe haven.”

As reported by HousingWire, Zandi also sees another cloud on the economic horizon. He says, the current coronavirus could cause a further slowdown of the U.S. economy, and if that happens, we may see people losing their jobs. He says, “If the economy slows to a degree that we start seeing job losses, the mortgage rates won’t be enough to offset the ill effects of that weakness.”

The Spread of the China Virus

As of February 5th, the World Health Organization had tallied more than 24,000 cases of the Wuhan coronavirus, with 490 deaths. Most of the infections are in China, where it originated, but health officials say it has spread to at least 25 other countries. Two deaths have happened outside of China. The number of people recovering from the virus is also rising. People with compromised health are the most vulnerable.

The big question is how far and wide the current Wuhan coronavirus will spread, and whether scientists can quickly create a vaccine. Some reports say, it will  take months, or possibly as long as a year.

Simulated Pandemic

Last October, scientists conducted a virtual exercise to demonstrate the economic and social impacts of a global epidemic or “pandemic.” The so-called “Event 201” was put together by the Johns Hopkins Center for Health Security, the World Economic Forum, and the Bill & Melinda Gates Foundation.

As reported by MarketWatch, the simulated event shows that an unchecked coronavirus could kill 65 million people within a period of 18 months. (3) Johns Hopkins scientist Eric Toner participated in the simulation and told CNBC that the death toll from the Wuhan virus could be in the millions if it spreads easily and resists vaccines. According to MarketWatch, the SARS virus struck 17 years ago, infected more than 8,000 people, and killed almost 800. Back in 1918, the Spanish flu killed some 20 million to 50 million people.

In addition to the health impact, there could also be social and economic impacts. At this point, The World Health Organization has declared an emergency in China, but hasn’t yet declared a pandemic. U.S. health officials also feel the risk here is low. But the virus has a long incubation period, and millions of residents in the virus epicenter of Wuhan had already left the city before the lockdown was in place. They are visiting family and friends to celebrate the Lunar New Year, which could lead to more infections.

Investors should always weigh economic risks and make sure they have their money in a safe place. Bonds may be safer than other investments. So is real estate, especially with those lower mortgage rates.


(1) Freddie Mac Report

(2) The Balance: Bonds and Mortgages

(3) MarketWatch Report

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