The surprise victory in Britain of the campaign to leave the European Union may be spurring panic across the Continent (and among some regretful British voters), but “Brexit” has left U.S. home buyers with a very definable windfall: mortgage rates that are now the lowest they’ve been in more than three years.
The average 30-year conforming rate on Monday was 3.46%, very near the lowest average rates recorded in late 2012.
Lower rates produce lower monthly payments and greater buying power—those who are well qualified can afford a home that’s 8% more expensive than at the beginning of the year. That’s more than enough to offset the rise in prices during that time.
And that’s why Brexit has just increased the opportunity to lock in a low associated mortgage rate for a new home. And maybe added a bit of urgency to the proceedings.
Low mortgage rates were already driving a strong real estate market this year—right up there with pent-up demand from first-time buyers, move-up buyers, and retirement buyers. And more and more real estate players these days are individual investors. Those investors—mainly wealthier and older households—are looking at single-family rentals as a reliable alternative to more traditional financial investments that, frankly, are flat-out lousy right now.
Those low rates have a downside, though: They motivate lenders to be tougher on credit restrictions. As mortgage rates declined this year, we’ve seen that credit access has gone down, too. That’s because lenders have become more risk-averse as their profit margins have been whittled down by the double whammy of lower rates and higher origination and servicing costs. On the whole, lenders prefer refinances, which present less risk and will likely surge again to capitalize on the low rates.
The tighter credit environment limits the first-time buyer pool and favors those who can avoid financing altogether. Or those who have grade-A credit. Or maybe those who can afford to shell out 20% or more on a down payment. So all this gives individual investors an advantage over younger buyers.
But both types of buyers tend to look at similar, more affordable properties.
And while some are chattering about whether the international economic tumult might push the U.S. Federal Reserve to cut interest rates at its next meeting, remember this: It doesn’t really matter what the Fed does.
What matters is the global movement of money. Got that? Bottom line: U.S. investment vehicles are becoming even more attractive to foreign investors. So as foreigners line up to buy the popular U.S. Treasury bonds, their prices go up but their yield (interest rate) goes down. The yield on the 10-year Treasury bond correlates with mortgage rates. Mortgage-backed securities are another investment whose popularity also pushes mortgage rates down.
But before we all put up banners, hire marching bands, and hold parades to celebrate the United Kingdom’s bold move, let’s take a big pause. Brexit is not likely to be a boon to all parts of the residential real estate market.
The U.S. economy will now likely see a bit less growth than had been expected for the year, as the energy sector and manufacturing are affected by a lower price of oil and a stronger dollar.
Likewise, the stronger dollar will dilute buying power for many international buyers (particularly the Brits), affecting such markets as Los Angeles, Orlando, New York, Miami, and Tampa.
And in general, we’ll continue to see weakness at luxury price points as long as the financial markets react to the uncertainty with lower stock values.
According to the 2015 Home Buyer and Seller Profile Report from the National Association of Realtors®, 20% of last year’s buyers sold stocks or used retirement funds for their down payment. Declines in portfolios will likely disrupt sales and closings, especially at higher price points. If we then see stock indices recover, the effect should diminish.
Those already winning in the real estate market are getting a bigger boost from Brexit. Sellers in the right locations and price points will continue to have the upper hand as investors and first-time buyers fight for limited inventory. Well-qualified buyers will be able to capitalize on historically low mortgage rates. And developers and builders should be able to take advantage of those lower rates to line up land and lots to fuel more inventory expansion down the road.