Britain’s historic decision to leave the European Union, in short, “Brexit”, has a huge effect on the global financial market. The Brexit has influenced vivid assets starting from federal bonds, Treasuries and certificates, gold, stock market, and even the US mortgage and real estate market.
For most of the Americans, Brexit’s effect on U.S. mortgage and housing prices is the most important consequence of the decision. It might seem unfamiliar that a political step taken by a different country could have any effect on US real estate prices. But, it must be remembered that it's the typical characteristics of a heavily interconnected global economy.
One of the most immediate effects of the decision was the downward daily yield curve rate on 10-year Treasury note. It dropped from 1.74% to 1.46% within a 4-day period (June 24, 2016, to June 27, 2016) according to the U.S. Department of Treasury. Home mortgage rates tend to follow the same pattern as U.S. Treasuries. So, we may assume that the downward Treasury index will heavily push the mortgage rates. As per the NerdWallet, the 30-year FRM loans have been down by 0.02% points already. But, we must remember that it’s a common trend that the mortgage interest rate may increase in future since it’s falling rapidly in the present times. The low mortgage rates will trigger a rise in home prices. It is because new home buyers may get influenced by the falling mortgage rates and they’ll try to afford bigger/costly homes with their same old income.
The benchmark of 30-year FRM increased to 3.73% from 3.69%, as per the survey of large lenders conducted by Bankrate.com. As per Freddie Mac, the average 30-year FRM was 3.56% until June 23, 2016. The rate was noted at the day of the Brexit vote. One day after the exit from the EU, the rate reduced to 3.6%, which is 0.56 points lower than the previous year. Four weeks ago, the rate was 3.82%. So, with the falling rates, it would be cheaper and easier for new homebuyers to afford their dream home buying.
Steve Rick, chief economist for CUNA Mutual Group, stated that - "The drop in U.S. interest rates, for example, the 10-year Treasury interest rate, would push mortgage interest rates even lower.This would create yet another mini refinance mortgage boom at financial institutions as homeowners rush to lock in near historic low-interest rates."
If you are one of the residents of major cities, it is quite reasonable for you to expect high prices for both commercial and residential houses. Also, if you haven’t reduced your monthly payments by using the current lower refinancing rates, now it’ll be your chance to grab the opportunity. It is because the Brexit vote will eventually put a speed breaker on interest rates for the time being.
In addition, many analysts also assume that Brexit or Britain’s exit from the EU may influence extra demand for American real estate properties. Especially, in the big cities like New York and Los Angeles, investors will target the prime real estate market as their most beneficial alternative to housing market of London. It is because investors are becoming uncertain over the rules regarding foreign investment in the post-Brexit UK. As a result, many of the investors will refrain themselves from investing to the U.K, and invest in the growing U.S. market.
KC Sanjay, senior real estate economist with Axiometrics Inc. says - “International investors have been increasing their holdings in the U.S. over the past several years, as they have gained a better understanding of the American apartment market and appreciation of the sector’s profitability.”
Housing market - The effect till now
Homeowners are pretty aware of the fact that it is wise to refinance their homes when the rate is getting low. So, the total number of mortgage applications is also rising along with the downfall of mortgage interest rates. Since the Brexit vote, 61.6% of all applications were for refinancing. As a result, the market index is also rising due to the increasing loan application amount. Following the Brexit vote week, the index rose up to 14.2%. Additionally, the refinance index was increased to 21%, and purchase index was increased to 4%.
June 2016 was the highest grossing month regarding home buying, with 592,000 houses sold since February 2008. That’s a flat 3.5% rise from May 2016 and nearly 25% more than the last year.
Signs are indicating that in the coming weeks, the US housing market may grow based on the investors concerned about the Brexit vote.