U.S. Treasuries vs. Real Estate
Historically institutional investors have two options if they want to “park” their cash in safe investments. The first option is Treasury Notes – which historically is risk-free. But if you want a higher return on investment, the other option is Real Estate.
According to the company Real Capital Analytics, the difference between these two asset classes in terms of returns is the greatest that has been registered in the last ten years. Particularly there was a peak last September (most recent data set available) when the 10yrs treasuries yield was around 2% while the overall real estate sector at a national level was yielding 7.1%. With inflation at 3.9% (for the 12 months leading to the past September), the treasuries have a negative yield in real terms. Suddenly real estate becomes way sexier than the debt markets.
Mortgages
Manhattan could assume the title of the “treasury note of the real estate world” since it is a market less risky given the ever present strong demand and consequent liquidity. This explains the slightly lower returns. Nevertheless a 5.42% average Manhattan yield is way higher than a 2% offered by treasuries; without taking in consideration the potential for upside in real estate prices and protection from inflation.The fact that treasuries are bought nowadays in great quantity by scores of investors who remain uncertain about the broad economic environment helps keep mortgage rates very low. In fact, mortgages are often tied together with treasuries by definition and fluctuate accordingly.
The retail mortgage market is on a good path to recovery and is functioning more fluidly each quarter.
The requirements for obtaining a mortgage are more stringent than a few years ago (obviously): credit score, financial soundness and down payment required from the applicant are the key hurdles to face. The goal of approval is getting more and more achievable by qualified candidates. For instance, if in 2009 private banks were requiring a down payment of 40%, now that number is closer to 20%. And in order to obtain a Fannie Mae or Freddie Mac approved loan up to $625,500, the minimum credit score required is 740.
On the other end, the securitization for jumbo mortgages above the Fannie and Freddie levels is still very limited. Banks are less inclined to originate loans that have to keep on their balance sheet instead of selling on the secondary markets through securitization.
Therefore who has the cash or access to finance for jumbo loans can grab really interesting opportunities in middle to luxury segments of the market.
The important positive note is that there’s basically no more fear of being denied financing in new construction projects (typically condos) that were once stigmatized and sometimes stalled. If the buyer is qualified, a mortgage will be available to the individual.
In my opinion, the residential market is sustained in the lower segment by the more comfortable access to financing while sometimes inflated for the top ultra-luxury segment where resources are sometimes narrowly employed in trophy assets that might eventually disappoint (remember Donald Trump experience with the Plaza). Looking into the middle segment ($1 million – $3 million) very interesting deals can be found. Romans used to say: “in medio stat virtus” – or “in the center lies virtue.”
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