The Impact of Brexit on the U.S. Real Estate Market

Written on July 5, 2016 by , updated on December 29, 2016

brexitThe British Exit, or as it’s more commonly referred to, Brexit, was the historic referendum in the UK to leave the European Union, as voted by the UK’s citizens. But what does that mean for the U.S. real estate market?

It was announced to the world just a week ago that the vote to leave the European Union was a success, and the world is still reeling in response to the British citizens’ decision to leave. One bigger piece of collateral damage from the vote is that the UK’s Prime Minister, David Cameron, has already announced that he will resign since a vote to leave signifies that he is not in touch with the wants of the country.

Experts argue about the impact of this change. But this is an unprecedented move, and nobody can predict the kind of impact it will have on the world. Still, despite all the doom and gloom prospects that experts are making, things are solid in the real estate market and especially in the United States.

This image was largely circulated, showing the vertical drop of the British 10-year government bond yields:

Brittish Bond Yield

World Markets in Light of Brexit

Forbes recently created an article on the impact that Brexit is having on world markets. Comparisons have been made to the 2008 global financial meltdown, but the world market is very different from what it was in 2008.

When Lehman failed, it initiated a global credit freeze around the world. When banks can’t lend, they can’t make money, and this made it a dire situation for countless businesses that needed access to capital to continue operations. The current financial system is primed and preparing for any potential catastrophes, and the manner that Britain handles the exit from the EU will go a long way toward easing further massive fluctuations in the marketplace.

Estimating Europe’s Growth

The European Central Bank believes that Brexit will take off up to half a percentage point in the gross domestic product growth in Europe. That’s certainly an impact, and it will have even greater effects long-term, but it’s not on the same scale as what happened with Lehman.

Brexit has broad implications, but it mostly looks like the focus needs to be on Europe as a whole. The impact, based on the ECB projections, isn’t going to catapult world markets into a downward spiral with no hope of recovery.

One of the reasons the impact will be minimal is because Britain has never adopted the Euro as the common currency. Provided the division in the EU doesn’t begin to spread with other countries leaving, the decision by Britain isn’t going to have a major effect worldwide. The real threat is if the Euro is affected in a substantial way. For that to happen, several additional countries would have to leave the union.

Countries Facing the Greatest Dangers

If other EU countries decide to follow Brexit and a massive exit ensues, the world’s second most widely held currency in the world will suffer. This would create a global financial crisis that would have a dramatic effect on world markets.

The countries that would likely be impacted first include Spain, Italy, and Greece. According to Forbes, in 2012, the 10-year government bond yields were trading high at 7%. These levels were not sustainable. Fast forward to today, and these countries are yielding only 1.3%. All economic indicators lead to Brexit not posing a real hazard to financial markets.

Brexit’s Effect on U.S. Real Estate Markets

While it’s true that lending, buying, and selling just became more of a risk around the world, the U.S. economy remains largely secure. In fact, when the world at large is uncomfortable with the future, homebuyers can expect to secure cheap loans.

The Mortgage Bankers Association said on June 30 that the silver lining of global uncertainty for U.S. housing and mortgage markets is the likelihood of continued downward pressure on U.S. Treasury yields. The 10-year yield has averaged 1.47% over the beginning of this week, and there is little reason to believe that rates will rebound significantly in the near term.

All in all, it could be argued that Wall street’s misfortune is the real estate market’s gain. Just looking at one random property for sale in Salt Lake City, pre-Brexit price was around $254,000, and this last week, the same property was valued at $293,000 (pictured below).

Capitol Hill home

While you can’t base investment decisions on a single property, there does seem to be correlation to real estate market stability in Wall street market turmoil and uncertainty.

If mortgage rates decline, that could be a boom both to prospective homebuyers and to homeowners who qualify for refinancing. And refinancing could make sense for people who are locked into rates of 4% or higher. Many lenders are expecting a wave of refinancing in coming weeks due to the rate drop, because all in all, 40% of borrowers have loans with a rate of 4.5% or higher, meaning they could save about $90 a month on average by refinancing at 3.5%.

The decision to leave the UN is expected to usher in a period of economic uncertainty across Europe and beyond as companies and investors pause to weigh the impact and seek out “safe” investments.

The Bottom Line

Economic turbulence could prompt the Fed to hold off on raising interest rates until next year, which would likely help keep mortgage rates low — keeping both borrowers and investors in the advantage.

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