COVID-19 and the Mortgage Market
Will One Major Disaster Lead into Another?
4 min read
When we say that we are a globally connected world, we really mean it. So many of us are connected through business, through products, through travel, and through economies. Just like the infographic being shared worldwide about how one COVID-19 infected person can potentially infect countless others when choosing NOT to stay home, many economic conditions cannot affect others. Such is the case with the current economy in the U.S…the world, if you want to get serious. The housing and mortgage market are likely to feel the sting from this potentially life-changing economic disaster, and its truly a cause-and-effect scenario.
Pre-COVID crisis—a Brief Investment Primer
The mortgage lending market and corporate bonds market are two sides of coin, in a way. They attract the same kind of investors, who are looking for a stable investment and fixed return on their money. Bonds are relatively secure because they represent loans to big organizations who historically pay them back—cities, huge companies, and even countries, are pretty reliable payers. Additionally, there are rating agencies who determine how safe an investment the specific bonds are, providing investors with information to help them make an educated decision. Lastly, bonds are sold on a public market, so investors can get rid of them when they want—or need—to.
There are different types of bonds, but Treasury bonds (guaranteed by the U.S. government) are considered the safest; this also means they offer the lowest rates of return. Since mortgages are a direct competitor for investment dollars, when the federal government dropped the interest rate, those investors began searching for other ways to obtain a reasonable return on their investment.
Banks keep interest rates on mortgages just slightly higher than Treasury bonds to keep investors interested. The entire real estate market is built on investors buying mortgages and people buying homes (and mortgages). In recent years, low interest rates have fueled an active real estate market in most places in the United States. Home values become unbalanced, skewed so that the values were unreasonable and not a true picture of what the properties truly were worth.
As properties become unnaturally valued, at some point an event is bound to cause the market to collapse. Welcome COVID-19.
The collapse of the global economy, with millions of people destined to be out of work, is sure to cause a lot of foreclosures. Companies will not be able to service their debts in this market and the overall drop in demand could further deepen the financial (and real estate) crisis.
Not everyone will face financial Armageddon during this pandemic. There will be some industries and individuals who are either (1) in a great financial position to weather the storm, or (2) are involved in an industry which provides necessary products and services to fight this pandemic. With dropping loan rates, they will look for opportunities to take advantage of attractive borrowing rates. Lenders, looking for customers, will provide attractive conditions to fuel lending to (relatively) stable borrowers, stimulating the economy, at least in long-term contracts.
The bottom line is that it could be important for consumers to do the economic stimulating here. For millions of citizens ordered to stay home (who are blessed enough to remain healthy), as the dark cloud fades away, they will venture out into the light like Punxsutawney Phil on February 2nd, money in pockets thanks to the lack of opportunities to spend it while they binge watched Netflix much of the winter and spring. Perhaps they can take the lead in improving the mortgage market. At least we can hope this is how it looks.
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