The historic decision for the United Kingdom to leave the European Union (E.U.), known as “Brexit”, was met with mixed results last week, but the real winner is forecasted to be the U.S. real estate market.
While the smoke and debris still needs to clear, the initial aftershocks from the Brexit vote have already been favorable for U.S. real estate. The political decision has sent foreign investor fleeing to U.S. government bonds, helping to drive interest rates down which has pushed mortgage rates to their lowest levels in more than three years.
The aftereffects of Brexit were first witnessed on U.S. government bonds, as yields touched new lows on Friday. The yield on the 10-year Treasury fell from 1.75 percent to a record low of 1.43 percent; while the yield on the 10-year note closed at 1.446 percent on Friday, compared with 1.492 percent on Thursday. The biggest change was the yield on the 30-year bond, which closed at 2.226 percent–a record low.
“U.S. investment vehicles are becoming even more attractive to foreign investors” said Jonathan Smoke, chief economist at Realtor.com. “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.”
As investors flock to U.S. Treasuries as a safe haven, mortgage rates continue to drop to historic lows. The average 30-year fixed-rate mortgage is 3.53 percent, down 20 basis point from a week ago, according to the latest Freddie Mac report. In addition, the Federal Reserve confirmed interest rates will remain unchanged with Chair Janet Yellen indicating she is unsure when the next hike is expected. This is good news for potential borrowers/homebuyers.
“Mortgage shoppers are often beneficiaries of market volatility and uncertainty,” said Greg McBride, chief financial analyst at Bankrate.com.
Other visible results from Brexit have been seen in Real Estate Investment Trusts (REITs) — which are expected to become a hot commodity amongst investors. According to the National Association of Real Estate Investment Trusts, REITs are generating dividend yields of approximately 3.7 percent and have average year-to-date total returns of 11 percent.
“Anything that is going to drive the 10 year lower is a positive for REITs. Three-and-a-half percent dividend yield with six to seven percent earnings growth is pretty darned attractive in this environment,” said Alexander Goldfarb, senior REIT analyst at Sandler O’Neill, a full-service investment banking firm.
Another aspect expected to be positively affected by Brexit is commercial real estate (CRE). The United States — particularly in large gateway cities and in the office market — is anticipated to become a safe haven for foreign investment, especially as investors run for the hills in the U.K. CRE sector. An influx of capital could be coming to the U.S. commercial real estate market very soon.
Open To Global Business
The U.S. housing market is ready to welcome the fallout from Brexit. The latest National Associations of Realtors (NAR) report revealed pending homes sales for the month of May declined for the first time in almost two years after steadily rising for three consecutive months. The Pending Home Sales Index, which measures contract signings, fell 3.7 percent to 110.8 for the month of May from a revised 115.0 in April. The year-over-year decline is the time since August 2014, however, it is still the third highest in the last year.
Additionally, total existing-homes sales grew 1.8 percent in May to a seasonally adjusted annual rate of 5.53 million. Existing-home sales are now up 4.5 percent from the same time last year, and their highest levels since 2007.
“The net effect will depend on location and price point, but overall, the Brexit will likely result in continuing growth in home sales with somewhat slower growth in home prices,” said Smoke. “The impact will benefit well-qualified buyers the most, and it will be a boon for sellers in affordable markets and price points.”
National Association of Realtors Chief Economist Lawrence Yun acknowledged in an earlier report the effects of the Brexit outcome, including how it could benefit the real estate market, especially in the commercial sector.
“[This] isolationist move will cause many wealthy foreigners to consider selling their properties in U.K., especially in London as it becomes less attractive place to set up offices to conduct global business,” said Yun. “Therefore, demand for U.S. real estate could rise if global investors view America as open to global business.”
The consequences of Brexit haven’t been so kind to London, however, as the city has already experienced a foreign bank suspend mortgage loans for London properties. According to The Guardian, Singapore’s United Overseas Bank said it would “temporarily stop” issuing the loans because of heightened uncertainty following the Brexit decision.
“As the aftermath of the UK referendum is still unfolding and given the uncertainties, we need to ensure our customers are cautious with their London property investments,” a spokeswoman told the daily newspaper.
Until the dust settles, the UK’s bold move to exit the EU will continue to provide worldwide reaction, but for the U.S. real estate market it should only mean good things to come.