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Silver Linings

Finding something positive in the current world of disease and financial turmoil is difficult. The stock market is down 37 percent from its high on February 19th to its low on March 23rd. The stock market has rebounded by 5,000 points as of the writing on April 7th. The coronavirus is spreading across Europe and North America with alarming speed. Even Western Colorado is getting impacted in a way that few would have imagined. It’s not unreasonable to expect that the lockdown scenario currently taking place in the United States to continue through mid-May.

Not since the Spanish Flu outbreak in 1918 have we seen a scenario where a sizable segment of the world’s population could be infected with a “pandemic” virus within months. The impact of such a scenario unfolding in this country could have a severe impact, at least for the short term, on the US and global economies.

But as fear of the coronavirus spreads around the world, there may be a silver lining for real estate markets, particularly high-end resort markets in Western Colorado. Without a doubt, the coronavirus scare is having a major impact on the world’s financial markets causing the worst global stock market declines since 1987 and 2008. As fear grips the stock markets, demand for safe havens has soared. The number one safe haven in the world is United States Treasury bills and bonds. This demand has caused interest rates to plummet.

As a result, we’re seeing historic reductions in interest rates. The 10 year treasury rate, used to price mortgage interest rates, is now fluctuating between a range of 0.50% to 0.86%. In an effort to shore up the economy and calm markets, the Federal Reserve is also aggressively cutting the federal funds rate with a 0.50& rate cut last week and likely future cuts in the near term that could drive that rate to 0%.

With this rapid decline in treasury rates, mortgage rates are also falling to new lows. The 30 year average mortgage has declined to about 3.29%, the lowest in 49 years of data-keeping as reported by Freddie Mac last week. The silver lining in the current market turmoil and flight to safety is that low interest rates are like jet fuel for both residential and commercial real estate markets and should create a floor under real estate values.

Unlike the period preceding the 2008 financial and mortgage crisis, banks today are healthy and well capitalized. The Federal government has promised to flood the financial markets with liquidity if necessary, to avoid any appearance of a liquidity crisis that led to the mortgage crisis of 2008. In addition, the national real estate market has been remarkably solid over the past few years.

Against this backdrop, the risks to the real estate market should be low even if this coronavirus threat leads to a recession. As money moves from equity markets, real estate markets could benefit over the long run as investors lock in low interest rates. Regardless of whether a recession is coming, real estate could be a winning investment for investors with a long-term view buying properties in this low interest rate environment. If you buy today taking advantage of low mortgage rates, you’re likely to see a strong return on your equity over the next decade. This was true after the Great Recession and likely to be true again in the next decade.

It’s times like these when the great investors step up and buy quality assets at a discount. In the real estate world, buying properties in a low interest rate environment is like buying stocks at depressed prices. If you have a long-term view, which is what you need when buying real estate, we could be seeing an unfolding of one of the best opportunities to buy prime real estate that we’ve seen in over a decade. With the growth in global wealth that will likely continue after this crisis ends, real estate markets in Western Colorado resort towns could be the big winners in this low interest rate environment.

About The Author

William Small, Zenith Realty Advisors

William Small brings over 28 years of experience in all aspects of commercial real estate to Zenith Realty Advisors. Based in Aspen, Bill Small provides commercial real estate investment consulting and advisory services to major US and foreign corporations and institutions.