“Winners and Losers”

The world has now had a couple of weeks to get over the shock of Brexit or the decision of Britain to exit the European Union. As week-three begins, global equity, debt and currency markets have stabilized. What does Brexit mean for the US mortgage and real estate markets for the next few months?

Here’s a quick rundown on potential winners and losers in the mortgage and real estate industries.

Winners

The US Mortgage industry. That’s because the flight to safety has depressed yields and should give refinances a modest boost and provide further support to the purchase market. While the consensus is that mortgage rates will substantially fall, it’s important to keep in mind the components that determine rates. Since Brexit occurred, the risk free benchmarks such as the 10-year treasury has declined by about 40 basis points. However, credit spreads rose which partly offset the drop in treasuries. That means wholesale mortgage rates fell by 29 basis points and have stabilized (Figure 1). If future turbulence occurs and drops treasuries further, keep in mind the pass through to mortgage rates will be more muted.

First time buyers and Consumers with ARM loans. The likelihood that the Federal Reserve will raise rates has been further delayed. So first time buyers can count on continued low mortgage rates to help with affordability issues. Similarly, re-setting adjustable rate loans will have less of a rate shock, and in some cases may even go down. In addition to the downward pressure on 30-year rates from market events, there is a push to drop both the FHA mortgage insurance premium and the GSE’s loan-level price adjustments, which will increase affordability.

Losers

High-end sellers, developers and realtors. The US equity markets have plateaued over the last 18 months and volatility has increased. This is an important development for the high end because as we have seen earlier (link to blog) there is a strong correlation between stock market indices and high-end ($1 million-plus) sales.

The private label securities market. Issuers and securitizers need more yield to make these deals work, and re-start the non-agency RMBS market. Continued low interest rates will push these deals even farther into the future.

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