As we battle both a healthcare crisis and an economic crisis due to COVID-19, it can be hard to keep up with topics that might otherwise be important to you like mortgage rates and opportunities in the North County San Diego real estate market.
When you do find time to consume the economic news, you might find it hard to digest. You’ll hear jargon like margin calls, short sales and T-notes. What does it mean for your average Encinitas homeowner? What does it mean for North County home buyers and sellers?
Instead of relying on opinions from the talking heads, you can stay better informed by understanding the underlying principles behind housing and mortgages.
In this article, we’ll cover the broad strokes of the latest mortgage and housing news. We’ll explain the difference between the Federal funds rate and the 10-year Treasury note, and their effects (or lack thereof) on mortgage rates. And we’ll explore the unique challenges and opportunities presented by COVID-19 to North County San Diego homeowners and prospective buyers and sellers.
Battle for Wall Street: The Fed vs Coronavirus
The economic impact of COVID-19 has been swift and far-reaching. In just a few weeks between February and March, the stock market lost all its considerable gains from the previous three years. This sharp decline prompted the Federal Reserve to cut rates down to rock bottom (0.00-0.25%) on March 15th. Sounds good for businesses—what about prospective homebuyers?
When you hear that “the Fed cut interest rates,” that refers to the Federal Funds Rate. It’s the interest rate that the Federal Reserve charges banks who in turn lend to businesses and individuals. Lowering the Federal Funds Rate gives businesses easier and cheaper access to capital, thereby improving their quarterly outlooks and share values.
Since stocks are seen as a relatively short-term investment, other short-term investments tend to follow the same trajectory. In mortgage markets, these include variable-rate loans, such as 3/1 and 5/1 ARMs, as well as home equity lines of credit, or HELOCs.
As the Federal Funds Rate rises and falls, so do the rates on these shorter-term real estate loans. Rate cuts by the Fed directly benefit North County homeowners with an adjustable-rate mortgage and North County homebuyers looking to get one.
But adjustable-rate mortgages are nowhere near as popular as longer-term mortgages like the conventional 30-year fixed-rate. How are those affected?
Safe Haven in Long-Term Investments
When investors are spooked by uncertainty in the stock market, they flock to more secure and long-term investments like Treasury notes and mortgage-backed securities.
You’ve probably heard of the “10-year T-note,” at least in passing. It is the most widely tracked government debt instrument and a common benchmark for other economic indicators. Along with other bills, notes and bonds, the US government partially funds itself by issuing 10-year Treasury notes. Investors receive a modest and relatively safe return in the form of interest payments that are exempt from state and local taxation.
You probably know about mortgage-backed securities, too—they precipitated the Great Recession. When a lender loans capital to a homebuyer, they don’t necessarily hold onto that investment. Oftentimes, they package the debt and sell it, acting as a middleman between many homebuyers and their ultimate debtholder. If the economy falters, that debtholder is left holding a big bag of bad mortgages. So begins a cascade of financial ruin, which in 2007-2008 we saw firsthand. Fortunately, lending standards are tighter now, and Americans as a whole are less leveraged with debt.
Because mortgage debt securities and Treasury notes are both long-term investments, their rates also tend to follow the same trajectory. When wary investors shift from stocks to long-term investments, that increased demand prompts lower interest rates on the long-term investment supply.
In short, the falling stock market led indirectly to lower 30-year fixed mortgage rates due to increased demand for long-term investments.
Opportunities for North County San Diego Homeowners and Homebuyers
On March 5th, the national average rate for a 30-year fixed mortgage hit its all-time low of 3.29%. Homeowners and buyers leapt at the opportunity to take advantage of this historic low, and lenders were soon overwhelmed by an onslaught of refinancing applications. In response, mortgage lenders raised rates back up to 3.65%. Since then, rates have fallen yet again and leveled out at a very attractive 3.33% over the past two weeks.
With average 30-year fixed mortgage rates again close to historic lows, now is a great time to refinance your existing mortgage or even buy a home.
Keep in mind that refinancing has costs. All told, the fees associated with refinancing—like closing costs, term extensions, and debt consolidation—can total upwards of $5,000. The first step is to make sure the numbers work out in your favor.
Conventional wisdom says that you should only refinance if current rates are at least 1 or 2% lower than your existing mortgage. However, real estate analytics firm Black Knight contends that a refinance makes sense for any homeowner with an existing mortgage more than 0.75% (or 75 “basis points”) higher than the going rate.
For prospective homebuyers, low rates mean they can afford more home with the same savings and income. Every basis point, up or down, makes a tangible difference in the cost of a mortgage across its lifetime. At 3.33%, today’s near-rock bottom 30-year fixed rates are incredibly appealing for buyers. The question is… during a global pandemic, are they willing to buy?
The impact of the novel coronavirus is still evolving throughout local real estate markets and the national economy as a whole. Stay-at-home orders make home tours complicated, if not impossible. If you’re looking to buy a home while rates are low, are you open to making an offer based entirely on a virtual tour, videos, photos, and a look at the exterior? Are you open to leaving your place of residence to tour a property with your partner and a showing agent?
Your Trusted North County San Diego Real Estate Advisers
At Caspersen Brothers & Associates, we are working hard every day to facilitate the needs of our buyer and seller clients with the utmost concern for their health and safety. Some buyers and sellers are motivated by external life events like relocation, divorce, or a birth or death in the family. Some buyers are looking to take advantage of low rates while they last. The good news is that, although business has inarguably slowed, sales are still happening. New listings are coming to market, properties are entering escrow, and deals are being closed.
If you are thinking of buying or selling a home, taking advantage of low rates by refinancing, or if you simply have a question about the market, feel free to reach out. We are always here to help, and it’s our honor to be of service. Now more than ever.
Stay safe, stay healthy, and stay in touch—figuratively, of course!