A recent outbreak of a coronavirus, first detected in Wuhan City, China, has gone from a local issue to a potential world-wide epidemic. The virus, which is easily transmitted between humans, is creating enough public health concerns that the US stock market has reacted negatively over the past couple of weeks. With this kind of volatility, is Denver real estate facing a potential issued based on the virus?
Running for Safety
The volatility of the stock market could potentially affect mortgage lending rates, fluctuating based on the economy. But how do mortgage interest rates connect with the stock market?
It begins with investors looking for a safe place to put their money. They want to get the best financial return while limiting the risk of losing money. With this in mind, the stock market can be a great place to park their cash. It’s a vehicle that can make big gains quickly, but can just as easily tumble, creating a loss of some or all of the investor’s cash. Because of the inherent risk, investors will bail out of the market quickly when the market shows signs of change.
On the flip side, Treasury Bonds are backed by the government and are a safe investment. Unlike the high-risk, high yield stocks, the investor’s money is secure, creating low risk and generally low returns. It’s a safe place for the investor’s cash, but the returns are nominal. This becomes the ongoing dance, determining the safest place for the investor’s cash while searching for the highest return.
It’s all about the Interest
While not necessarily tied together, a volatile stock market can affect bonds and mortgage interest rates. Although movement on one side does not automatically mean movement on the other, in general when stocks go up, so do interest rates.
Mark Smith, a Denver-based investment advisor shared some insight on the volatility of the stock market and concerns over the coronavirus. Speaking about the recent stock market losses Smith says, “Right now, it’s emotional. We are still pretty solid economy wise.“
If the coronavirus doesn’t create a worldwide pandemic, as some fear, and have a deeper effect on our economy, this scare may actually have created a needed reset in the market. According to Smith, “Markets had such a run-up, it was time for it to have a pull-back. Long term investors needed to sell and lock in their gains. Professional investors will eventually get back into the market and start buying again.”
How Is Denver Affected?
The world we live in is much smaller and more connected than ever. As an example of the far-reaching effect, consider the travel industry. The spread of the disease has slowed, and in some cases stopped travel. Reduced air travel lowers tourism, which can affect US based airlines and cruise operations. Lower sales mean lower profits for these public companies, bringing company stock prices down. The volatility in the stock has investors selling and moving into safer investments. This movement has the potential to adjust interest rates, ultimately affecting home sales in Denver.
While the example is general and somewhat theoretical, the Fed just lowered interest rates in response to the coronavirus fears and world-wide interest rate reductions. This is good news for Denver home buyers who are able to purchase at historically low interest rates, but for the national economy it could be an ominous sign. Should the coronavirus gain momentum, the Fed has little room to adjust in managing the economy.
What’s the outlook?
The United States has not seen a big influx of the virus to date, with less than one hundred reported cases nationwide. Worldwide the number of reported cases is north of 89,000 with more than 3,000 deaths. The key is the speed to finding a cure for the disease and eradicating the fears in the market.
For now, Denver real estate has another opportunity to boom with remarkably low interest rates. Despite the fears, the overall economy remains strong. As we get ready to head into the Spring real estate season, Denver continues to sit in a seller’s market, with buyers having big incentives to purchase.
