#Brexit: The Immediate Impact on U.S. Mortgage and Housing Finance

 

brexit

After much speculation on the U.K.’s decision — British voters decided to leave the European Union — now many speculate about how this will affect the U.S. economy.

Here is a summary of the opinions that impact the housing and mortgage finance industry:

First, Standard & Poor’s reports it may downgrade UK sovereign ratings: now at “competitive disadvantage compared with other global financial centers.”

Stateside, financial institutions sought to downplay fears in the early hours Friday.

“We affirm our assessment that the U.K. economy and financial sector remain resilient and are confident that the UK authorities are well-positioned to address the consequences of the referendum outcome,” the G-7 finance ministers and central bank governors stated.

“We recognize that excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability,” their statement continued.

So how do experts think the market will react to this decision?

“The market action in Treasuries and Gilts continues to evolve in line with the playbook from the 2011 U.S. sovereign downgrade,” said Mike Schumacher, head of rate strategy Wells Fargo.

“There is one key distinction: this time Gilts are leading the way,” Schumacher said. “Should Gilts lead Treasuries?  We think not. We still expect capital to flow out of the U.K., with the U.S. being a very likely destination.”

“In the June 17 edition of the Rates Explorer, we called for two-year and 10-year Treasury yields to reach 0.5% and 1.3%, respectively, in the week or two after a leave victory,” Schumacher continued. “We stand by these projections. In the Asia trading session, the two-year reached 0.5%, while the 10-year bottomed at 1.4%.”

Then he adds this important point:

“We still expect capital to flow out of the U.K., with the U.S. being a very likely destination. In the June 17 edition of the Rates Explorer, we called for 2yr and 10yr Treasury yields to reach 0.5% and 1.3%, respectively, in the week or two after a “Leave” victory.”

In fact, the Brexit vote may not cause as dramatic of an effect as some people think, and will even take years before going into effect, said Andrew Kenningham Capital Economics senior global economist. The economy may even see benefits such as loosening monetary conditions.

“Goldman Sachs has a long history of adapting to change, and we will work with the relevant authorities as the terms of the exit become clear,” said CEO Lloyd Blankfein in an internal memo following the Brexit vote, according to an article by Stephen Alpher for Seeking Alpha.

On the other hand, some experts point out the downfalls that could come from the vote.

“Isolationist move will cause many wealthy foreigners to consider selling their properties in UK, especially in London as it becomes less attractive place to set up offices to conduct global business,” said Lawrence Yun, the National Association of Realtors chief economist. “Therefore, demand for U.S. real estate could rise if global investors view America as open to global business.”

“But overall, global economy and job creations could modestly slow down with more frictions in place to do commerce,” Yun said. “The British economy will be disrupted and hence we should expect fewer Brits able to buy in the U.S”

Previously, after the recent shockingly low jobs report, some experts pointed to the Brexit vote as a deciding factor on the Fed raising rates.

“The sudden stop in employment growth rules out any chance of a rate hike from the Fed at next week’s FOMC meeting, particularly now that the UK vote on whether to leave the European Union appears to be going down to the wire,” said Capital Economics Chief Economist Paul Ashworth.

“The people of the United Kingdom have spoken and we respect their decision,” said Jacob Lew, U.S. Secretary of the Treasury. “We will work closely with both London and Brussels and our international partners to ensure continued economic stability, security, and prosperity in Europe and beyond.”

“We continue to monitor developments in financial markets,” Lew said. “I have been in regular contact in recent weeks with my counterparts and financial market participants in the UK, EU and globally and we are continuing to consult closely.  The UK and other policymakers have the tools necessary to support financial stability, which is key to economic growth.”

Sources: The New York Times, The Wall Street Journal, Housing Wire

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