Brexit triggers US mortgage rate slide

In an election year, every vote counts – even those in other countries.

The United Kingdom voted to leave the European Union on June 23 and a month later mortgage rates in the United States took a tumble. The correlation – U.S. Treasury bonds.

The British exit, commonly referred to as Brexit, prompted the rate of a 30-year fixed mortgage to drop to 3.36 percent July 29, matching the record low rate set in December 2012. That compares with 4.05 percent at this time last year.

How do U.S. Treasury Bonds figure into the equation? The bonds and the mortgage rate work in tandem. Essentially, when one goes up, the other goes down.

Post Brexit, international stock markets took a hit as investors watched with uncertainty, prompting what’s known as a flight to quality, or the move away from riskier investments to the safest possible investment vehicle. Cue the U.S. Treasury bonds.

“U.S. general mortgage-backed securities are generally safe,” said Aaron Jernigan, president of mortgage banking for OakStar Bank. “That influx drove the price of mortgage bonds up and the yield, or mortgage rate, down.”

According to Black Knight Financial Services’ monthly mortgage monitor, post-Brexit mortgage interest rates have increased the number of refinance candidates in the market by 1.3 million borrowers, bringing the total to around 8.7 million refinance candidates today, the largest such population since late 2012. The mortgage and real estate analytics company calculates a newly eligible borrower as someone with a current rate at or above 4.25 percent.

“It’s a record low,” said Carla Green, mortgage loan manager and vice president with Arvest Bank Springfield, on current mortgage rates. “Will it go down again? We can’t count on that, but we’ve been saying that for years now.”

The housing market
The Mortgage Bankers Association reports a 14.2 percent post-Brexit bounce in mortgage applications. Local banks are on par with the national trend, Jernigan said. OakStar has seen a 14 percent increase in volume over the same time last year for the Springfield market. For the area’s largest mortgage company based on Springfield Business Journal list research, that’s 100 more transactions valued at $13.7 million year to date. In 2015, OakStar reported 913 loans totaling $167.8 million in mortgage volumes in a 50-mile radius.

“We’ve seen an increase in closings, there is no doubt,” Jernigan said, noting of the 100, 52 are purchase transactions and 48 are refinances. “That’s partly because of the rates, but also because of the hot economy for housing in Springfield right now. It’s the hottest I’ve seen in 20 years.”

According to the Greater Springfield Board of Realtors – which oversees activity in Greene, Christian and Webster counties – the average time homes are on the market is falling.

Through June 2, homes in the three-county area spent 65 days on the market, which compares to 89 days during the same period last year. In May, the average was 52 days on the market, down from 74 a year earlier, according to SBJ archives.

“I’ve seen people who like a house and go back to put an offer on it a couple days later, and it’s already gone,” Jernigan said. “It’s a big sellers’ market. There just aren’t that many houses out there right now. Basically, don’t wait.”

Since tying the record low, mortgage rates already have started to creep back up. As of Aug. 2, the 30-year fixed mortgage rate was 3.38 percent.

“I expect to see them rise, but there is a lot of Brexit information still to come out,” Jernigan said. “When you’re tied to the international economy, things can change often.”

Prolonged effects
While the stock market’s knee-jerk reaction to the news and subsequent mortgage rate fall may be the most visible impacts on the United States, the potential Brexit timeline leaves plenty of room for more. According to the Lisbon Treaty, an EU member state exit takes 24 months once an initial letter of intent is received. The United Kingdom has yet to send its letter.

“That timeline was put into place so countries couldn’t use exit as a bargaining chip, like professional athletes and their contracts,” said BKD Wealth Advisors LLC portfolio manager Jeffery Gann. “A lot can happen between now and then.”

Gann said as global assets flow into America, it can be a double-edged sword. Using the United States as a safe haven strengthens the dollar, a move Gann said has the potential for a serious negative impact on the American economy.

“That makes our goods more expensive overseas,” he said. “When we aren’t exporting, we aren’t manufacturing as much. When we aren’t manufacturing, we don’t need as many workers and so forth. It’s not a good cycle to fall into.”

International companies, such as Apple Inc. (Nasdaq: APPL), are losing billions on an already strong dollar. According to its quarterly Securities and Exchange Commission filing, the iPhone maker “saw continued currency weakness” in the vast majority of its international markets, CEO Tim Cook said.

For the first three months of the year, Apple revenue declined by 9 percent, or about $2.3 billion from last year.

The day after Brexit, the U.S. dollar quickly rallied against the British pound, up 6.3 percent, its biggest one-day gain since 1967, according to CNNMoney. As of Aug. 3, $1 is worth 0.75 pounds.

On the flip side, a weak dollar isn’t desirable either.

“A strong dollar is good domestically, but a weak dollar is good for exports,” Gann said. “You have to find that happy balance.”

Ameriprise Financial Services Inc. wealth adviser Paula Dougherty said significant price swings in the market are nothing new. The key is how to react.

“A number of notable events, many arising without much warning, have occurred in recent years causing markets to react,” she said, pointing to the 2011 Japan earthquake and tsunami, a temporary shutdown of the U.S. federal government in 2013 and the dramatic drop in oil prices that began in 2014. “These events had an impact on stock markets in the short run, but over time, stocks recovered.”

Dougherty advises investors to diversify and try not to be influenced too much by headlines. For now, Gann said it’s a waiting game as Europe forges a path ahead and the market reacts.

“Locally, it could give the (Federal Reserve) more reason to raise interest rates,” he said. “But right now, it’s just wait and see.”