June 30th, 2016
As we discussed in our most recent newsletter, the citizens of the United Kingdom made the historic decision to leave the European Union on June 23rd, throwing a wrench into the global economy. While a two-day freefall in U.S. markets (as well as global markets) ensued, U.S. investors have now regained their footing.
As you will see, the U.S. real estate market is poised for more?not less?growth following Brexit, and lenders and loan officers are likely to be the first ones to benefit.
As of June 28th, the yield on the 10-year U.S. Treasury was around 1.46%. Prior to the U.K. vote it was 1.74%. Though currencies and U.S. stocks have recovered somewhat, the prevailing uncertainty is likely to bring the 30-year mortgage rate lower than the previous all-time low of 3.31% set in November 2012. Interestingly, the 10-year Treasury yield stood at 1.65% in November 2012, meaning that Treasury yields need not fall much further for mortgage rates to continue the downward trend. Even if the spread between mortgage rates and the Federal Fund Rate tightens, mortgage rates may continue to drop.
As with any stock market downturn, the current panic will create new winners and losers. But real estate, which has been one of the best performing sectors since the Great Recession, is likely to add to its gains.
One of the hardest hit sectors during the Great Recession was the U.S. housing market. The Federal Reserve responded to the crisis by lowering the Federal Fund Rate, which encouraged investment and lowered mortgage rates. By all accounts, this strategy has worked and real estate has outperformed nearly all other sectors since the crash. With yet another round of uncertainty, the Fed has backed off its hawkish line and reduced its projected interest rate hikes for 2016 from two to one. Besides being good news for consumers, this is great news for people looking to buy a home or refinance an existing mortgage. And it is also good for banks and loan officers, who will have no trouble drumming up business when all other investments seem to offer far more risk than reward.
In May, the Mortgage Bankers Association (MBA) revised its predictions for new mortgages and refinances in 2016 for the fourth time this year. Currently the MBA expects $1.68 trillion in new mortgages for 2016. At the beginning of the year, the association expected only 1.38 trillion. The total for 2015 was $1.63 trillion. Anybody who has followed the market and the state of the economy over the last year can tell you that uncertainty has only increased. Around a year ago, it was the collapse of the sudden slowing of the Chinese economy. Six months later it was increased interest rates. Now, it?s Brexit. Throughout it all, the housing market and the mortgage industry have experienced solid growth and steady upward revisions.
An ancillary benefit of Brexit is that as the British Pound and the Euro are under pressure, making the U.S. dollar a better home for foreign investments. This should encourage foreign real estate buyers from China and elsewhere to pull up stakes in Europe and invest in U.S. properties.
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