Blog with MAE Capital

Covid Recovery what it means for Real Estate and Interest Rates

March 10th, 2021 11:53 AM by Gregg Mower

We are now hearing that COVID-19 infections have slowed to levels where the leaders of our country are beginning the opening process of the economy.  This is great for the rest of the world but in the Real Estate and Mortgage business, we have been enjoying low-interest rates and a booming Real Estate market.  I know this is odd when so many people have been out of work or working reduced hours.   What we have seen is that those in the entertainment business and restaurant business have been hit the hardest.  The technology sector of the economy has exploded during the lock-down with Zoom and video conferencing leading the charge.  We have seen a significant increase in online ordering with consumers realizing the ease of ordering their goods and services online from the safety of their own homes.  But now that the economy is opening again what do we expect to see from here, are we going to see changes in consumer habits with regards to how they get their goods and services, are they going to go back to restaurants, malls, are they going to be distracted from buying Real Estate?

These questions are what we will be exploring here.  Why has Residential Real Estate boomed when we had high unemployment?  I believe the answer is that interest rates have been at historic lows with consumers able to lock in rates in the 1’s 2’s and 3’s. With interest rates, so low people have been able to qualify for larger homes and been able to refinance their existing mortgage to a low rate even if there has only been one person working in the household.   People that have been confined to a small home have seen the walls start to close in quickly and they have realized that they need a bigger space.   Add kids to the picture and people have found that moving from cities, where housing is generally confined to smaller spaces, to the suburbs where they could afford a larger home with a yard has been one of the Pandemic phenomenon’s we have seen.   Will this trend continue?  This remains to be seen, as Cities when they are thriving, have fine dining, close shopping, and entertainment venues, and a variety of social activities that the suburbs don’t.  Will people go back to cities or has the idea of being close to other people become a bad idea for health reasons, will people stay away from large crowds?  These are questions I can’t answer but time will tell.   One thing I have learned about this pandemic time is that nothing has gone as you might expect with regards to the American way of life so as people invent a new way of life we will have to pay close attention to new trends.

While Residential Real Estate has boomed during the pandemic commercial Real Estate has died off almost completely.  With giant office space where people, prior to the pandemic, worked in full capacity now have gotten used to working from home.  Companies that have traditionally been driven to office collaboration have migrated to meeting over video platforms and staying productive without the need for expensive office space.  As leases expire, I am not sure if companies will re-up them or reduce the space that they require.   This tells me that commercial Real Estate will be on a long road to recovery.  As for retail space and malls, I believe it will be a long road if it ever comes back as it looked like prior to the pandemic as consumers of all ages have embraced online commerce where they don’t have to leave the comfort of their home to get what they want.  This leaves existing retail and office space vacant which is terrible for the owners of these properties as they are not receiving the income they did prior to the pandemic.   This also remains to been seen how the demand for this existing space will expand into the future.

With the economy opening up and as the government spends “COVD Relief” money like it grows on trees, we will be seeing inflation as the US dollar will be devalued against other countries' currencies.  With inflation, we will see rising interest rates to slow down inflation by making the cost of money more prohibitive.  The rising interest rates will cut more people from the Real Estate buying frenzy as with higher interest rates people can’t qualify for as much of a home as they did with the low-interest rates.  This should slow demand for housing probably in the late summer of 2021. In addition, the higher interest rates will slow the refinancing boom as well with most of America has taken advantage of the low rates in 2020 and the beginning part of 2021 will not have the need to refinance again.  There will be some folks that could not refinance for various reasons, such as loss of a job, or decreases in pay, or self-employed, and for those reasons, we will see demand being slowed but still steady.   Another factor is the Federal Reserve has said that they will not raise the rates they control until there is a 2% or the greater inflation rate, which they are not seeing happening until late 2021 at the earliest.  So, the Federal Reserve will keep rates low until the time they see inflation higher than they believe is healthy.  

For the better part of 2021, the Residential Real Estate market will continue to thrive until the demand has been fulfilled.   This, of course, will vary depending on the Real Estate market you are in.  If you are in a large City it may take a while for all sectors, Residential and Commercial to recover.  If you are in small cities and towns where people have been moving to from large cities, I believe the demand will continue to be high until big cities have fully opened and all their services are back up and running.   People will still be hesitant to move to cities out of fear of the Government shutting things down with another pandemic or something else the Government thinks they need to protect us from.   That said interest rates will in 2021 will stay in the 2’s all the up to the low 4’s depending on inflation.  Residential Real Estate in the suburbs will stay strong commercial Real Estate, I fear, will be on a long road to recovery.  If you are looking to refinance or buy a home this year remember that MAE Capital Real Estate and Loan is your go-to for the lowest interest rates and fast service.    

Posted by Gregg Mower on March 10th, 2021 11:53 AM



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