Brexit Reverberations

A View from the Beach

A View from the Beach

ECONOMIC COMMENTARY
July 5, 2016 – The United Kingdom’s vote was certainly felt by the markets. Stock markets around the world plummeted, oil prices moved lower and interest rates fell to record low territory. These low rates are spurring another round of refinancing across the land and these rates are expected to spur home sales as well. Meanwhile, as we mentioned previously, there is much that will have to play out before we see what the real long-term effects will be with regard to the move of the UK out of the European Union. Our stock market seems to have realized this fact as it has already recovered the ground lost.

For example, now there is a Regrexit movement which calls for a “do over” referendum. If that happens, the markets may breathe a sigh of relief, but there still will be an air of uncertainty. For example, if Regrexit moves forward, would Prime Minister Cameron withdraw or delay his resignation? Will the Brexit vote stir other countries to act? The timing and format of the exit is certainly up in the air. From our point of view, the biggest question market watchers are asking is — how will the issues in Europe affect our economy?

We have important economic data coming out this week. As important as the job report is-we must keep in mind that the data covers a period which is mostly before the Brexit vote. Nevertheless, it is an important report, especially considering how weak last month’s employment report was. Analysts will be looking at whether the numbers bounce back and if May’s jobs numbers are revised upward. In light of the initial reaction to the Brexit vote, any spark of good news will be helpful. Our stock market has already experienced a great post-Brexit rally and moderate-to-strong employment growth could continue to bolster stocks as long as rates stay low.

Weekly Interest Rates Overview

The Markets. Rates moved lower as expected in the wake of the Brexit vote. Freddie Mac announced that, for the week ending June 30, 30-year fixed rates fell to 3.48% from 3.56% the week before. The average for 15-year loans also decreased to 2.78% and the average for five-year adjustables moved down to 2.70%. A year ago, 30-year fixed rates were at 4.08%, more than one-half of one percent higher than today’s levels. Attributed to Sean Becketti, chief economist, Freddie Mac –“In the wake of the Brexit vote, the yield on the 10-year U.S. Treasury bond plummeted 24 basis points. The rate on 30-year fixed loans declined as well, but not by as much, falling 8 basis points to 3.48 percent. This week’s survey rate is the lowest since May 2013 and only 17 basis points above the all-time low recorded in November 2012. This extremely low rate on home loans should support solid home sales and refinancing volume this summer.” Note: Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.

Current Indices For Adjustable Rate Mortgages
Updated July 1, 2016

Daily Value Monthly Value
June 30 May
6-month Treasury Security  0.36%  0.42%
1-year Treasury Security  0.45%  0.59%
3-year Treasury Security  0.71%  0.97%
5-year Treasury Security  1.01%  1.30%
10-year Treasury Security  1.49%  1.81%
12-month LIBOR  1.337% (May)
12-month MTA  0.467% (May)
11th District Cost of Funds  0.690% (Apr)
Prime Rate  3.50% (Dec)

REAL ESTATE NEWS
 Brexit happened. And one of the biggest, and most immediate effects on everyday Americans is how it will change interest rates on home loans. Greg McBride, Chief Financial Analyst at Bankrate, said rates could sink to record lows in the coming weeks. “If you’re a borrower, don’t wait to lock your rate,” he said, “as this opportunity may not last long.” They’ve already hit rock bottom this year. In the past month alone, 30-year fixed-rates on home loans have hovered around 3.7 percent, nearly a three-year low. Britain’s vote to leave the European Union is expected to drive rates even lower. Rates have been about 17 percent lower than the median of this decade. However, McBride said his long-term outlook does not change with the Brexit vote. He still estimates a rebound from ultra-low rates by year’s end. Mortgage Bankers Association Chief Economist Michael Fratantoni forecast a rate of 4.8 percent by December 2017. That would be the highest rate since 2009, and a 30 percent boost from current levels. By the end of 2016, Fratantoni expects rates to reach 4 percent. He noted that he’s turned his estimates more conservative in recent months, but predicts an increase nevertheless. That could change with the Brexit referendum passing, however. He noted that Treasury rates had already dropped about 20 basis points the morning after the vote. “At this point, it is unclear whether this will just be a short term disruption, or whether it will have a longer-term impact,” Fratantoni said. “Our best guess at this point is that the impact on the residential real estate sector will be to keep rates on home loans lower for longer, likely leading to another pickup in refinance activity.” Source: The Washington Post

Americans ranked real estate as the best long-term investment, even over stocks and gold, according to a recent Gallup Poll of about 1,000 U.S. adults. Real estate has been the top investment choice for the past two years, and its lead is increasing over four other popular investment choices. Thirty-five percent of Americans selected real estate as their top investment choice compared to 22 percent for stocks and mutual funds; 17 percent for gold; 15 percent for savings accounts/CDs; and 7 percent for bonds. By comparison, 34 percent of Americans said gold was their top long-term investment choice in 2011 while 19 percent said real estate.  “As the average sale price of new homes in the U.S. increased from $259,300 in August 2011 to $348,900 in February of this year, the percentage of Americans picking real estate as the best long-term investment almost doubled,” according to Gallup. Furthermore, renters (32%) and home owners (34%) are about equally as likely to choose real estate as their top long-term investment choice. Source: Gallup.com

Freddie Mac, McLean, Va., said three out of four homeowners born before 1961 are confident they will have a financially comfortable retirement. The company’s 55+ Survey of housing perceptions and preferences of Americans over the age of 55 also found that the majority of homeowners in this age group were very satisfied with their homes, their communities and their quality of life. Consistent majorities also said homeownership makes financial sense at almost every stage of adult life, whether or not a person is married or has children. “Homeownership works,” said Dave Lowman, executive vice president of Single-Family Business with Freddie Mac. “The American Dream delivered greater financial stability and satisfaction to the homeowners who lived through every recession since the 1970s, including the housing crisis of 2008.” The survey also noted while many over age 55 would prefer to age in their current home, nearly 40 percent said they would prefer to move at least one more time and 70 percent of those said they are likely to purchase their next home. Lowman said this willingness to purchase homes could create “significant opportunities and challenges” for the industry in years to come. “The decisions the nation’s Baby Boomers and other older homeowners make will have an enormous impact on the demand for housing and new credit for the foreseeable future,” Lowman said. Source: Mortgage Bankers Association

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