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Interest rates dropped to a 19-month low at the end May, as the 10-year treasury fell 100 basis points to 2.24% from its five-year high. The longest real estate cycle in history continues, and it’s left us wondering what the implications are for the market, and what course of action we should take. Our associates at Colliers International interviewed our good friend Craig Russell, Senior Vice President at Walker & Dunlop, to learn from his insight on these unprecedented events:

“Since last November, the 10-year treasury is down 100 basis points (1.0%) to 2.24%. This after steadily increasing over 100 bps the prior year to a five-year high of 3.24%. Uncertainty and pessimism over future global economic growth is causing money managers to move from equities to bonds as a safe harbor.

Meanwhile, spreads have surprisingly held so that most or all of the treasury decline is reflected in today’s rates. This translates to 12% more debt proceeds available to either increase purchasing power or juice returns by decreasing required high-cost equity.

Fixed Agency 10-year rates for apartments are currently (and approximately depending on size, location, affordability and more) as follows:

  • High Leverage up to 80%:                  4.00%
  • Moderate Leverage up to 65%           3.80%
  • Low Leverage below 55%:                 3.60%

Life company fixed rates for moderate and low leverage product are 20 bps inside of Agency. Meanwhile, adjustable rate mortgages have not commensurately declined as LIBOR and other short-term indexes have remained steady. ARM rates are higher than fixed rates at similar leverage points but have the advantage of greater prepayment flexibility.

Finally, what about the future? The market has clearly priced in slower growth expectations so a shock would be either:

  1. Even slower than anticipated growth or a down-turn
  2. A better than anticipated expansion.

The former would result in a further rate decline and the latter in rates trending back up. Given that we are near historic low fixed interest rates, better to take the “bird-in-hand” and capture the recent gain in purchasing power and/or improvement in cashflow.”

We would like to thank Colliers International and McKay Chhan Wayne for this real estate market snapchat on May 31st, citing the information above. Contact Juniper today to learn more.