Brexit: Why Britain Left The EU and Why Homeowners and Homebuyers Should Care
Last night, after months of speculation, concern and endless arguments; England voted in favor of Brexit. What is Brexit? Brexit is a nickname for “the British Exit”, in reference to Britain’s Exit from the European Union. Why did Britain want to leave the EU? Since the beginning of the European debt crisis, Britain’s national sentiment has become increasingly anti-EU. This, along with the Migration Crisis, has made many British citizens dissatisfied with the role that the UK plays in the EU.
In 2013, British Prime Minister David Cameron promised that if he was reelected he would renegotiate the terms of the UK’s role in the EU. In particular, he would renegotiate the UK’s rights regarding economic governance, competitiveness, sovereignty and immigration. Then, he would put the UK’s membership in the EU to a referendum. These negotiations took place in December of 2015.
True to Prime Minister Cameron’s promise, there was a referendum on June 23, 2016 to decide whether the UK should remain in the EU. In other words, Britain is held a vote on its relationship with the EU: does it stay, or does it go? The votes are in: Britain will begin negotiation for its formal exit from the EU, and must be completely separated by June of 2018. This is a significant moment for Europe, as it will have a large, potentially destabilizing impact on the economic, social and political conditions of the region. It is also going to have a significant impact on the world—including the United States.
Why should you (a potential homebuyer) care?
As Britain exits the EU, European markets are likely to destabilize. As a result, investors will be searching for a secure asset to invest in. U.S. treasury bonds are some of the most stable investment options available to those interested in foreign assets. As the demand for treasury bonds rises, the profit that investors receive from buying a bond (yields) will drop. When bond yields drop, mortgage rates follow. For a detailed explanation of the relationship between bonds and interest rates, see this article.
Mortgage rates are at a 3-year low, and may continue to drop despite the Federal Reserve’s decision to increase interest rates over time. For instance, in 2014, the 30-Year FRM Average in the United States was 4.17%, the 15-Year FRM Average was 3.3%, and the 5/1 ARM Average was 3.0%. Today the 30-Year is 3.54%, the 15-Year is 2.81%, and 5/1 ARM is 2.74% (FRED Economic Data). Federal Reserve chair Janet Yellen said that the Fed’s decision to keep interest rates low was partly due to the unknown outcome of the Brexit decision. Now, we must wait to see how the Federal Reserve and markets at large will respond.
What does this mean for U.S. homebuyers and homeowners? According to Forbes, buyers can expect a decrease in mortgage rates with Britain’s divorce from the EU. Home buying will be cheaper and easier in the short term; however, in the long term, buyers should be conscious of increases in real estate pricing. Uncertainty in Europe could mean an increase in foreign real estate investment in U.S. markets. Increased demand for U.S. real estate will increase prices and may push younger and low-income buyers out of the market.
Homeowners should take advantage of low interest rates while they are still here, and refinance. According to HousingWire, borrowers are already refinancing because of the current low interest rate environment. Mortgage applications increased 2.9% from June 10th to June 17th; with refinancing applications making up 57.7% of that mortgage activity. Right now (especially in light of Brexit), refinancing is a good idea.
Brexit is likely to have a positive effect on the U.S. real estate market in the short-term, making it easier for buyers to buy with lower interest rates. Borrowers who refinance will make their monthly mortgage payments lower. If you want to take advantage of the results, it’s advised to do it sooner rather than later. Between the Federal Reserve’s desire to increase the interest rate and the potential flood of foreign buyers, the real estate market may not be ripe for long.
What will you do in the wake of the low interest rate opportunity? Comment below.