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Brexit means lower rates for longer


Mortgage rates plunged to three-year lows after last month’s Brexit vote, where voters in the United Kingdom surprised markets by opting to leave the European Union (EU). Steve Hovland, director of research at the real estate investment management company, HomeUnion, spoke with Scotsman Guide News about what that decision means here at home.

The Brexit decision surprised a lot of people. Will this have much of an impact on the U.S. housing market?

Steve HovlandThere are two different ways Brexit could impact the housing market. One is that fear could lead to global contagion, and take some of the slow-growth economies, like the United States and Germany, and flip them into recessions. We don’t think that is going to happen. The U.S. and the UK are not highly linked from an economic standpoint. The more likely scenario is that the UK is going to be in for a bit of a bumpy ride, especially the London housing market, but the United States housing market will enjoy lower interest rates for longer.

Why have rates fallen this far at this point in the recovery?

Well, we are staring at eight years of almost zero interest-rate policy. So there is a lot of money out there. There are not a lot of great-yielding investment vehicles, so a lot of investors are looking for safety plays. The U.S. Treasury is considered the risk-free rate, so we are seeing a lot of capital being pumped into the U.S. debt. That is why we are seeing interest rates so low right now.

Do you believe the Fed will still raise interest rates at least one time this year?

The market is pricing it at a 12 percent chance as of [Tuesday], but that involves a lot of uncertainty. As the uncertainty becomes clearer over the next several months, the chance of the Fed raising rates in December probably drifts closer to 50 percent. We know that the Fed has to reload their gun. At some point, we will be in a recession. We are going to need higher interest rates in order to cut rates. That being said, we have Brexit, the U.S. election, and we also had the commodities markets. We have seen oil prices kind of stabilize. By the time December rolls around, the UK will have a new leader and a roadmap for how Brexit will proceed; and the United States will have chosen a new leader.

Where do you think the 30-year fixed rate will end the year?

It is going to be higher than it is now. I think 3.5 percent, 3.45 percent —kind of where we are at —- is a floor. Because of transaction costs, mortgage rates can’t go much lower. As money trickles out of U.S. Treasuries with less uncertainty, we’re going to see the 30-year rate drift into the high 3 percent range, probably about 3.8 percent. I don’t think we will see 4 percent interest rates until at least next year. When the Fed does raise rates, it will be like pushing on a string. They are going to have to move rates two, possibly three times before they can actually make a profound impact on mortgage rates because there is so much money sitting in Treasuries.

What factors could keep rates down longer than people anticipate?

There are several factors that could keep them down. We know this Fed is a data-driven Fed, more so than any in the past. What is often overlooked is that they are a very-recent-data-driven Fed. They are looking at the recent numbers, and not the broad picture of the U.S. economy. If you look at the broad picture, we have added millions of jobs. Unemployment is at 4.7 percent. The equity markets were at all-time highs last year. So the low-interest rate policy from an eagle’s eye perspective seems like it is too aggressive, but this Fed acts on recent data. Keeping rates low will be a bad jobs report before the September or December meetings. The release of the preliminary numbers [of the second quarter’s gross domestic product] at the end of this month will be very telling on what happens.

 What is your assessment of the housing market right now?

The overall housing market is on very solid footing. We see plenty of demand, and demand is outpacing supply by a wide margin now, even with elevated prices. There is the making of a bubble in certain areas, such as San Francisco, parts of the Bay area and some coastal communities in southern California and New York. But overall the housing market is strong. In terms of investment, there are plenty of opportunities out there for investors. It is not like it was in 2010 and 2011, where just about every house was an opportunity. Investors have to do more due diligence today, but the right markets and the right neighborhoods in those markets are still producing high-yielding assets, some of the best-yielding assets among any of the vehicles out there. 


 

Questions? Contact at (425) 984-6017 or victorw@scotsmanguide.com.

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