The early evidence was that Great Britain's exit from the European Union (EU), an action popularly known as "Brexit," would be good for U.S. mortgage consumers because it pushed rates down. However, economic events can have long-term ripple effects that alter or even reverse their immediate impacts.
Take Brexit's impact on the U.S. stock market as a micro example of how things can go full circle following an event. In the first two trading days after the unexpected result of the Brexit vote, the S&P 500 lost 5.3 percent of its value. However, after just four more trading days, it had gained back all but 0.5 percent of that loss.
Could mortgage rates go through a similar reversal of their initial reaction? That cycle might play out over a much longer period than the one in the stock market, but there is reason to believe that any initial benefit to consumers might not last.
Why Brexit Pushed Rates Down
The two weeks following the Brexit vote saw 30-year mortgage rates drop by 15 basis points, and they are now approaching their all-time lowest level. Why did this happen? Two reasons:
- Economic weakness favors low interest rates. Brexit is likely to hamper British trade with the rest of Europe as well as with regions it has access to via trade agreements negotiated by the EU. This will primarily hurt Britain, but it will also be damaging to the EU as well as having some negative impact on global growth. Slower growth cools inflation and encourages low-interest-rate monetary policies.
- The U.S. dollar is a beneficiary of concerns with Europe. Both the euro and the British pound lost value relative to the U.S. dollar in the wake of the Brexit vote. This gives U.S. consumers more purchasing power for imported goods, which helps suppress inflation. Low inflation helps mortgage rates and other interest rates remain low.
Why the Benefit May Not Last
While most U.S. consumers would readily sign up for lower mortgage rates, there are reasons not to celebrate too soon about the Brexit vote:
- Economic weakness raises credit concerns. While a slower economy might encourage low interest rates, it also might lead to a rise in unemployment. If the finances of consumers take a hit, look for lenders to become more cautious. The result might be a return to the environment seen shortly after the financial crisis, when the one drawback about low loan rates was that relatively few people had good enough credit to actually qualify for them.
- Financial market distress could dry up capital. The availability of credit depends on money being made available by investors who are willing to provide the capital to be lent. Even beyond the credit concerns discussed above, if investors generally are suffering due to adverse global market impacts from Brexit, there will be less capital available for lending.
The lesson is, don't judge an event by its immediate impact. The ripple effects of Brexit have yet to be experienced, and if you have an opportunity to buy a home or refinance a loan now, you may not want to wait to see what those ripple effects bring.