It's too early to say what the final result of the turmoil in Europe will produce, but in the short run the decision by Great Britain to leave the European Union has been obvious: Mortgage rates have sharply fallen.
Mortgage rates move up and down constantly, but the jolt caused by the British election has produced a visible dip in the market. Depending on who you ask, quotes at or below 3.50 percent for 30-year, fixed-rate financing turned up a few days after the historic vote. No less important, one can argue that low mortgage rates may be with us for some time.
According to Freddie Mac, mortgage rates stood at 3.56 percent for prime, 30-year, fixed-rate mortgages for the week ending June 23rd – the day of the Brexit vote. This rate is decidedly low by historic standards and it's also substantially lower than a year earlier when the same loan was priced at 4.02 percent.
Negative Mortgage Rates
But if you think rates in the U.S. are low, consider our friends in Europe. The Wall Street Journal reports that some mortgage rates are below zero and borrowers are actually getting checks from lenders because they have financing with negative interest rates.
"Hans Peter Christensen," said the Journal, "got some unusual news when he opened his most recent mortgage statement. His quarterly interest payment was negative 249 Danish kroner.
"Instead of paying interest on the loan he got a decade ago to buy a house in this northern Denmark city, his bank paid him the equivalent of $38 in interest for the quarter. As of Dec. 31, his mortgage rate, excluding fees, stood at negative 0.0562%."
Could mortgage rates fall below zero in the U.S.? The automatic response is to say that could never happen here, but then the automatic response to the Brexit vote was that it would never pass….
Could mortgage rates fall even further than they are today? Yes. How low could they go? Until they get there, if they get there, we don't know.
The reality is that there has been nothing like the planned British exit from the EU, so we don't have an historic model to consider. And, if we did have a historic event it doesn't mean the current situation will follow the same pattern. As Wall Street tells us, past performance does not guarantee future results.
However, there are three reasons to believe that U.S. mortgage rates might go lower.
Why U.S. Mortgage Rates Could Fall Lower
First, after the British vote, the Fed is unlikely to raise bank rates. The Fed does not regulate mortgage rates, but if bank rates go up many people believe mortgage rates will follow. However, since the Fed raised bank rates in December, mortgage rates have declined.
Second, there is more than $10 trillion invested worldwide with negative interest rates. That's a huge pool of cash ready to soak up additional demand and hold down rates.
Third, U.S. banks have roughly $2.3 trillion in excess reserves money borrowers don't need or want at the moment.
Keep your eyes on what happens in Britain, if nothing else it may be the best beach-side reading of the summer. And while you're at it, speak with loan officers if you want to finance or refinance because rates today are not far from historic lows.