In periods of market uncertainty and volatility, investors often seek the ‘safe-haven’ of US Treasury bonds. This movement of investment capital from equities into bonds often pushes interest rate yields lower. Given that mortgage loan rates are tied to 10-year US treasury bond rates, this ‘flight to safety’ often pushes mortgage interest rates lower as well.
We are seeing this dynamic take place again as this election cycle draws to a close. As reported by CNBC, “the average rate on the popular 30-year fixed mortgage fell to 2.78% for the week ending Nov. 5, down from 2.81% the previous week and 3.69% the same week one year ago, according to Freddie Mac (Homeowners and buyers are the real winners in this election).” Mortgage rates are now nearly a full percentage point lower than they were at this time last year.
However, there is a way for investors to continue to receive higher yields in real estate, even though mortgage rates have fallen. The key is to look to the residential ‘Fix and Flip’ market. We have written quite a bit about the strong trends pushing demand higher in the residential real estate lending (Three Market Trends Make a Strong Case for Residential Real Estate Lending).
Low mortgage rates coupled with low supply of homes for sale are putting upward pressure on home prices. As reported by CNBC, “In Denver, for example, record low inventory of less than a one-month supply pushed prices to yet another record high.” In addition, as more families increasingly need to work for home, many buyers are seeking larger homes with more space to work.
The demand for new homes continues to be high and the supply of new-construction housing is at an historical low, meaning more buyers will continue to be pushed into the market for existing homes. We believe the strong trend in demand will remain in place for some time. This bodes well for the Fix and Flip market. Lower mortgage rates will only add fuel to this dynamic.
At Aloha Capital, we lend to real estate professionals that buy and rehab older-stock homes that need to be updated. We refer to this as the Fix and Flip market. As mortgage interest rates have fallen, the demand for updated existing-home stock has only increased. We too are experiencing an increase in loan demand from our partners (Almost a Year Later, the Demand for Fix and Flip Still Strong).
To be clear, success in the Fix and Flip market is not predicated by low mortgage rates. The demand for loans to rehab and update older housing stock is strong regardless of mortgage rate levels. However, given the current low-rate market dynamic, we expect this heightened level of demand to be in place for quite some time. Investors looking to add stable, consistent and repeatable income from real estate to their portfolio should give us a call.