The decision by voters in the United Kingdom in June to leave the European Union resulted in a swift reaction from the world economy. The initial response was a major drop in the U.S. stock market, which has since rebounded, and a loss in value of the British pound.
Another early economic response to the Brexit vote was a drop in mortgage rates in the U.S. to near-record lows. This created a potential short-term benefit for consumers and lenders, as homeowners looked to take advantage of the low interest rates to refinance existing loans or buy new homes. However, many in the mortgage industry remain concerned about the potential longer-term negative impact of Brexit on the U.S. economy and overall housing market.
Holden Lewis, senior mortgage analyst at Bankrate, said in the immediate aftermath of Brexit “investors from all over the world began to buy more U.S. Treasuries and mortgage-backed securities, which are viewed as safer investments. When purchases of these go up, rates go down. Mortgage rates could stay down for quite a while, but no one knows for sure.”
Downward pressure
Britain’s exit from the EU will “most likely continue to put a downward pressure on mortgage rates and continue to create demand from traditional buyers who want to use financing to purchase their homes,” said Daren Blomquist, vice president of RealtyTrac, a real estate data analytics firm. He noted, however, there is always a possibility that the Federal Reserve Board may raise interest rates but so far that has not occurred.
Bob Walters, chief economist at Quicken Loans, said the markets have never had to deal with something like Brexit before, which creates economic uncertainty.
“When markets are uncertain, they (investors) dump riskier assets such as stocks and corporate bonds, and load up on less risky assets such as U.S. Treasuries and mortgage-backed securities,” Walters said. “The increase in demand for U.S. government-backed mortgage securities has caused the prices of those securities to rise, which pushes mortgage rates lower.”
While no one knows how long the lower rates will last, Walters said they may provide a strong incentive for more consumers to consider refinancing their current loans. Many homeowners are locked into rates of 4% or higher, he said.
“Homeowners that may not have been in a position to refinance a few years ago when rates were at record lows may now be in a better position to refinance,” Walters said.
A surge in refinancing applications seemed to play out in the weeks immediately following the June 23 Brexit vote. A July 8 press release from Zillow cited an increase of 132% in refi requests from consumers for the week of June 27 when compared with the week before the Brexit vote. Zillow also reported that on the week of July 4, the second week after Brexit, refi requests were up nearly 108% indicating a continued high demand. Purchase requests also increased but to a lesser degree: 24% and 13.3% respectively for those weeks.
The Mortgage Bankers Association recently announced a change in its 2016 forecast, expecting higher mortgage origination volume primarily driven by Brexit, in response to the increased levels of purchase and refinance activity seen across the industry. The MBA reported an initial surge in mortgage applications in the two weeks immediately following the Brexit vote. However, mortgage applications decreased in the last three weeks of July, according to MBA figures.
Bankrate has been monitoring the 30-year fixed mortgage rates since 1985, according to Lewis. A record low occurred in December 2012 with a rate of 3.5%. The national average as of June 29 was 3.61%. Even with the near historically low rates, he said initial results from the mortgage industry were “somewhat mixed with some lenders seeing an increase in applications for loans and refinances and others not.”
Consumer confidence
Lewis said many homeowners want to take advantage of the low-interest rates, but are still wary about the overall strength of the economy,
“First, people want to take advantage of low rates but inventories are tight,” he said. “Second, with the recent drop in the stock market and ongoing economic turmoil, it fuels a lack of confidence. Third, consumers are not always driven to buy a home due to low rates but many times by where they are in their lives such as being at an age where they want to settle down, buy a home and start a family.”
As a result, Lewis said new home sales may not benefit from the low-interest rates, but refinancing may increase as homeowners look to take advantage of better financing terms.
Lewis said in general home prices in the U.S. have remained fairly high this year, even with relatively slow economic growth.
However, many high-end coastal trophy markets have seen a drop in home prices, due in part to less foreign capital flowing in from other countries like China, according to Blomquist. These high-end markets generally have a lot of foreign buyers who pay cash to purchase residential real properties, he said. One example is in San Francisco County where home prices in May 2015 were up by 23% compared with May 2014. In May of this year, home prices in San Francisco County were down 3% compared with the same month a year ago, Blomquist said.
“What is happening now with Brexit is similar to what occurred last year when the Chinese economy tanked,” he said. “It had an impact on the real estate market in the U.S. and resulted in a downward pressure on mortgage rates. As the global economy weakens, mortgage rates will most likely stay low and also result in less capital flowing from Britain into the U.S. due to the weakened British pound — similar to the Chinese effect last year.”
While the substantial drop in mortgage interest rates post-Brexit is a welcome boost for homeowners purchasing or refinancing a home, Walters said it’s too early to tell how long the lower rates will last.
“We could see slower growth overall in the U.S. economy due to the lower price of oil and stronger dollar,” Walters said. “Slower economic growth along with the uncertainty for investors and home buyers created by the decoupling of the British economy from the EU and the stock market shake-up tends to favor mortgage rates staying low for quite a while.”
Freelance writer Carole Jakucs contributed to the writing and research of this article.
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