Some might say that the past week has been full of panic, uncertainty, challenge, anxiety and dread – to say the least. For days, they have been scrambling around town stocking their carts with droves of water bottles, filling their bags with food provisions to last weeks, stowing clothing feverishly as if there is no coming home, and pulling cash out of ATM’s to have on hand. Finally the day of reckoning came… Chexit. That’s right; Chexit is my acronym for Child-Exit, which is when our children are sent off to their respective camps for the summer vacation. It’s finally here! Yay! Wait… is it wrong to celebrate such a momentous occasion?!
All jokes aside, the hysteria in the news over the past week has been Brexit. Brexit is the abbreviation of “British exit”, referring to the June 23, 2016 referendum by British voters to exit the European Union. Britain is the 5th largest economy in the world, and will be the first nation to ever leave the EU.
Brief History
The European Union (EU) was formally established by the Maastricht Treaty on November 1, 1993. The EU is a politico-economic union of 28 member states that are located primarily in Europe with an estimated population of over 508 million people. According to Wikipedia, The EU has developed an “internal single market” through a standardized system of laws that apply in all member states. EU policies aim to ensure the free movement of people, goods, services, and capital (the “four freedoms”) within this internal market. Moreover, within the Schengen Area (26 states, including four which are not members of the EU) passport controls have been abolished. (Yikes!). The Euro, the official monetary currency of the zone, was adopted in January 1999. The euro is the second largest reserve currency, as well as the second most traded currency in the world after the United States dollar. Interestingly, as of August 2014, the Euro has the highest combined value of banknotes and coins in circulation in the world, surpassing the U.S. dollar.
Market Impact
The true economic impact of Brexit will not be known for years or decades to come. In the short term, it will depend on what type of exit strategy is negotiated by Britain and the EU. There are also questions such as – will Britain still retain access to the EU for trade? How long will it take Britain to actually leave the EU? What will the impact be to economic growth in the U.K. and the remaining countries? Will this departure cause other countries to follow suit? As is the case with any unprecedented geopolitical event, the long term market effect is difficult to predict – resulting in economic chaos and interim uncertainty.
Central Banks
In the aftermath of the vote, the global financial system remains well functioning. Central banks across the globe were quick to reassure the market that they were proactively monitoring the situation and stand ready to intervene with liquidity to banks and markets as needed. In the US, the economic uncertainty coupled with the stronger dollar make the chance of a Federal Reserve rate increase highly unlikely. There are talks of a “rate cut”, but I personally doubt something like that would happen without significant market turmoil in the US.
Recession Talk
The odds of a recession in the US may now be as high as 50 percent according to Bill Gross, renowned manager of the Janus Global Unconstrained Bond Fund. While Britain represents a small part of the global economy, Friday’s vote will slow trade, immigration, and growth around the world, which have driven economic expansion for years, he said. He further forecasted that this might be the end of globalization as we know it. If these economic slowdown predictions are true or start coming to fruition, low interest rates and potential economic stimulus would become very likely in the US.
Housing Markets
On the one hand, the stronger dollar will dilute buying power for many international buyers affecting hot market areas such as California, Florida, New York, and New Jersey. Furthermore, we will likely see weakness for luxury homes and condos as long as the there is uncertainty in the financial markets. Additionally, stock and equity losses will put some would-be buyers on the sidelines, and declines in portfolios will likely disrupt pending sales and closings. Conversely, for the typical homebuyer in the US, the global turmoil should represent a tremendous buying opportunity while foreign money is sidelined and mortgage rates have dropped. If the financial markets continue to sell-off, it is also possible that our real estate market could be flooded with foreign investors flocking to the U.S. as a safe haven for real estate.
Mortgage Rates
Higher-risk assets around the world, such as high-yield bonds and emerging market stocks have experienced selling pressure and continued market volatility. Safe-haven assets such as U.S. Treasuries and U.S. mortgage-backed securities are the big winners in the aftermath of the Brexit decision. The lower yields in the U.S. are more attractive to investors compared with the low or negative interest rates as those available in Japan or Germany. As the 10-year UST gains favor, its price rises and its yield falls thereby reducing interest rates. Mortgage rates are now at record lows not seen in over three years. Some are predicting that the yield on 10-year U.S. Treasury bonds may fall to 1.25 percent further decreasing mortgage rates.
Seize the moment
Volatility is expected to increase in both currency and equity markets in the U.S and abroad. It’s quite possible that markets may rebound over the coming days, but it is far too early to make sense of the longer-term implications of this historic event. One thing is for certain however, and that is that mortgage rates are down, and those looking to buy a house or refinance an existing mortgage can very well capitalize. If you were on the fence, now is your second chance to seize the moment. As always, Approved Funding looks forward to helping you navigate the real estate, interest rate, and market impact that these actions will have on our marketplace.
A special shout-out to Meyer Sabo and Claude Bienstock for your always kind words.
By Shmuel Shayowitz
Shmuel Shayowitz (NMLS#19871) is President and Chief Lending Officer at Approved Funding, a privately held local mortgage banker and direct lender. Approved Funding is a mortgage company offering competitive interest rates as well specialty niche programs on all types of Residential and Commercial properties. Shmuel has over 20 years of industry experience including licenses and certifications as certified mortgage underwriter, residential review appraiser, licensed real estate agent, and direct FHA specialized underwriter. He can be reached via email at [email protected].
