Like an impromptu divorce, the United Kingdom (UK) voted to leave the European Union (EU) at the end of last week. Known semi-affectionately as “Brexit,” this decision represents an economic disaster for the EU, the UK and all parties involved.
In immediate response, global stock markets recoiled, the value of the Pound Sterling plummeted to a three decade low, and the Prime Minister declared his intention to step down in the near future. The next two years will usher in a period of uncertainty in the UK as it renegotiates its trade deals with the remaining members of the EU, many of whom may take this opportunity to chastise the UK in an effort to de-incentivize other EU members from leaving as well. Some pessimistic prognosticators declare the UK is but the first lemming to jump in the nascent unraveling of European civilization.
But as the short-term economic effects of the Brexit ripple across the globe, it’s prudent to maintain perspective and patiently see through all the bluster. Despite the initial shock wrought by the referendum, will California’s housing market be materially affected?
Nada, in the end.
Some temporary tremors will surely be felt in the Golden State, but they will be short-lived and minimal. So pop an antacid, take a deep breath, and read on to see how the Brexit is not the cataclysm some may lead you to believe.
What the Brexit means for the U.S. housing market
The Brexit will influence the U.S. markets in the following ways:
Trade and stocks
Beyond simply leaving the EU, the Brexit signifies a number of changes ahead for the UK. Economically speaking, the UK and EU will have to renegotiate trade deals with all 27 EU members, which will affect not just the UK market, but industries that have business ties in the UK.
For example, U.S. companies that manufacture goods in the UK won’t be able to sell to European markets without hefty tariffs. They will either need to accept lower profits (which they won’t) or move out of the UK. This will prove costly to the business and the UK’s economy.
Depending on how trade negotiations go, analysts predict the UK’s gross domestic product (GDP) will decrease 3.8%-7.5% in the next 15 years. Further, the loss will be about $6,000 per household, according to the Economist.
Pollsters and media outlets said a Brexit was unlikely. Therefore, the news of the Brexit on June 23 caused shock throughout the global economy, causing global stock markets and the value of the Pound Sterling to dip, from $1.47 U.S. Dollars for every Pound Sterling to $1.37 immediately following the Brexit, and down to $1.32 at the time of this writing.
This makes the cost of U.S. exports more expensive, making it more difficult for U.S. exporters to compete. This may hurt the U.S. economy somewhat. However, since trade with the UK and EU makes up only 3% of total U.S. trade, the dent won’t be crippling. Further, it is important to note that commerce from California to England (and vice versa) is scant.
Confidence and uncertainty
Here in the U.S., the Dow Jones industrial average fell 610 points, or 3.4% following news of the Brexit. At the time of this writing, it continues to fall, and the psychological effect throughout other economic sectors is beginning to show.
All of this market movement is bad news for confidence in the economy, which can put off both homebuyers and sellers. Especially for those with jobs in the financial industry, buying or refinancing a house today might not be the wisest decision, as future layoffs or job relocations are possible aftershocks of the Brexit.
Buyers may be temporarily gun-shy as they see the hit to the value of their stock investments, but the dust will quickly settle.
Some manifestations of the Brexit in California will be entirely positive. With that lack of confidence comes lower mortgage rates.
How does that work?
While investors worldwide are too cautious to invest in European markets, investment vehicles backed by the security of the U.S. government sound like very safe investments. Thus, foreign investors will invariably pour demand — money — into Treasury Notes. Increased willingness to pay higher prices for Treasury notes actually lowers the yield (interest rate) on these notes. As the interest rate drops on U.S. Treasuries, other related interest rates — like fixed mortgage rates (FRMs) — are pulled down, to the benefit of those in the housing market.
The national average mortgage rate dropped following the Brexit, from 3.625% to 3.5% the day after, according to Mortgage News Daily.
Further, the Federal Reserve (the Fed), cognizant of the temporal uncertainty, is unlikely to raise interest rates anytime soon, perhaps not until 2017. This is good for homebuyers and refinancers, who now have a bit longer to lock in low rates.
Beyond the initial financial panic caused by the Brexit, there’s little cause for worry for homebuyers and sellers in California.
It will take two years for the UK to fully leave the EU, which means markets and businesses will have a chance to react ahead of the actual trade changes. In that time, the Fed will undoubtedly raise interest rates, which it would have done with or without the Brexit.
Over the short-term, you may see some volatility in the housing market, which won’t last more than a few weeks. During times of economic uncertainty, it’s often best to wait for the froth to subside. Therefore, you may see more hesitant homebuyers in the coming weeks. Still, the recent drop in interest rates will likely counteract this hesitation as homebuyers seek to take advantage of low rates (particularly after they observe the sky hasn’t fallen).
Over the long-term, California’s housing market won’t look any different than it would have otherwise.
Don’t let the Brexit hype fool you: the economy of the U.S. and California are still in good shape, and the housing market will remain strong. Instead, turn your sights closer to home. Lack of construction, restrictive zoning and high home prices are all factors more likely to cause hiccups in the housing recovery. Read more about other factors affecting California housing here.