As cases of COVID-19, also known as coronavirus, surpass 5,000 in the United States as of March 17 and global stock markets tumble amidst concerns over economic uncertainty, the Federal Reserve has taken measures to address economic turmoil. Most notably, the Federal Reserve has engaged in a series of interest rate cuts that have caught the attention of real estate investors and potential homeowners alike.
Beginning on March 3, the Federal Reserve lowered benchmark interest rates to between 1 percent and 1.25 percent. Then, on March 15, the Federal Reserve took the drastic step of cutting interest rates further to between 0 and 0.25 percent. In a statement accompanying the second rate cut, the Federal Reserve expressed awareness that “[t]he effects of the coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook,” and remained optimistic that the interest rate cut would “help support economic activity, strong labor market conditions, and inflation returning to the Committee’s symmetric 2 percent objective.”
Some members of the Wall Street investment community, however, felt that the Federal Reserve “blew it,” making an uncalculated decision based on fear, rather than waiting to see how serious the impact of coronavirus would be on the economy. Other economists, however, praised the quick action taken by the Federal Reserve and lauded its two-prong approach of cutting rates while simultaneously agreeing to purchase $700 billion in bonds and securities to help bolster the economy. As the debate continues regarding the wisdom behind the Federal Reserve’s recent emergency measures, another conversation is developing regarding what impact, if any, the rate cut will have on mortgage rates nationwide.
There is no question that the coronavirus pandemic has impacted mortgage rates. According to Freddie Mac, mortgage rates reached an all-time low during the week of March 4, following the first of the Federal Reserve’s interest rate cuts, but began to climb the following week as lenders began processing an increased number of refinance applications. As this pandemic continues to wreak havoc on a global scale, mortgage rates may once again dip to a new low. However, real estate investors should not expect a 0% mortgage rate, as mortgage bonds are viewed as riskier than government bonds and the interest rates that mortgage loans are tied to are generally higher.
That being said, mortgage rates have been as low as 2.5% recently and may remain quite low for the foreseeable future. If the federal government and our banking system prioritize support for low-income Americans experiencing the greatest fallout from this epidemic, there’s a sliver of possibility that interest rates could reach record-breaking lows. American banks could even follow in the footsteps of financial institutions in countries such as Denmark, where banks in 2019 began offering 10-year-fixed-rate mortgages at a negative interest rate. For now, only time will tell as investment markets, the global economy, and human beings across the globe wrestle with this tragic outbreak.
