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Notes from the Hill: Brexit

What Will Brexit Mean for the U.S. Housing Market?

Russell McIntyre    |    Housing Policy

The United Kingdom’s decision to leave the European Union through popular referendum (‘Brexit’) has dominated the news cycle this past week – disrupting financial markets, flaming populist movements throughout Europe, halting trade corridors, and even influencing the presidential race here in the U.S.

Though the implications of Brexit will reach far and wide, here are a few issues to keep in mind regarding the U.S. housing market:

Mortgage Interest Rates
Britain’s exit from the EU could lead to record-low mortgage interest rates in the U.S. over the coming weeks and months. These rates are driven by both domestic and international investors through the mortgage-backed security market, as well as the current yield on 10-year Treasury notes, which have become a safe haven for investors fleeing turbulence in Europe. Combined, these factors have created a downward pressure on mortgage interest rates that could push them even further below their current three-year lows. Eventually, these rates will have to pick back up, so the question centers on how long they remain depressed. Many economists do not see a raise coming until mid- to late-2017.

Homeownership
Many prospective homebuyers may use this opportunity to step into the housing market, as the U.S will see an increase in consumer homebuying power due to the lowered mortgage interest rates. Additionally, businesses and investors who view this move by Britain as too isolationist may opt to relocate to more corporation-friendly countries. These two factors could lead to an increased demand for both residential and commercial real estate in the U.S.

Federal Reserve Benchmark Interest Rate
This past month, Federal Reserve officials voted to maintain the benchmark interest rate at 0.25 percent, after increasing it this past December for the first time since the 2008 financial crisis. Just days before the British referendum, Fed Chairwoman Janet Yellen was optimistic that the Fed could raise that benchmark interest rate at least once more during 2016, potentially multiple times. However, the complications imposed by Brexit might place these ambitions on hold, with the Fed now focused on ensuring there is enough liquidity in international financial markets that just saw more than $2 trillion in stock value erased in a matter of days.Some groups predict that the Fed will look past this current tumult and continue with their plans for rate hikes; however, the significant uncertainty stemming from Brexit has created a high level of skepticism within the financial services industry.

Despite the current panic, there is little reason to think Brexit will have a long-term or significant impact on the American economy. Factors such as job availability, real wages and consumer confidence should not be affected. In the end, despite the enormous financial losses and current political upheaval, the U.S. housing market still has plenty of room to continue to grow.



1 Read Sam Khater's Brexit blog here.

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