Why should there be any ways Brexit could affect homeowners in the United States? Brexit is a portmanteau word, recently coined to describe Britain's exit from the European Union (EU). The United Kingdom of Great Britain and Northern Ireland may have the world's fifth (or sixth following the Brexit referendum on June 23) biggest economy, but it's a small island of 65 million people, 4,200 miles off the east coast of America. What do its political minutiae have to do with us?
You can thank globalization for making it mean a lot. Today, money moves across national borders seamlessly, and global investors (including the people managing your pension fund) based almost anywhere in the world can move huge sums internationally in the blink of an eye. So, if a country suddenly looks to be a less safe bet than it was, those investors can quickly move their money to somewhere safer. When they're spooked, the haven they regard as the safest of all is the United States. And when they're really scared they turn to the ultimate sanctuary: the U.S. Treasury. Of course, they need to maintain a balanced portfolio with a mix of riskier holdings with better returns and safe investments with lower yields. And, at the safer end of that spectrum, not too far from Treasury bonds, are American mortgages. All this means that, when foreign economies look dicey, cash tends to pour into American government bonds and mortgage-backed securities, and the law of supply and demand sees bond yields and mortgage rates fall.
So what are the ways Brexit could affect homeowners? Here are three:
1. Not At All
Okay, you're right. When it comes to "not at all," the train left the station some time ago. On the day after the UK referendum, The Washington Post ran the headline, "How Brexit could push mortgage rates to historic lows," and U.S. News and World Report carried a similar report under "Brexit Could Drive Mortgages to 'Historic Lows." Few doubt that the Brexit referendum played a big part in pulling rates down further after June 23, but it's worth remembering they'd been on a downward trajectory through January to June, and the extra steepness in their decline wasn't all that huge. And they never did reach the all-time lows seen in the last couple of months of 2012, though they came close.
Then, in the second week in September, they suddenly jumped as investors feared an early hike in general domestic interest rates by the Federal Reserve. By then, the early panic over British withdrawal from the EU was largely forgotten, and you may wonder whether we'll hear much more about it ever again. So, at least starting from now, "not at all" might well turn out to be the answer to a question concerning the ways Brexit could affect homeowners in America.
2. Just a Bit
During the pre-referendum campaign, just about every serious economic expert in the world warned of the dire consequences of Britain leaving the EU. Leaders of many nations, including President Obama and then British prime minister David Cameron, were joined by the governor of the Bank of England (the UK's equivalent of the Federal Reserve), the head of the International Monetary Fund, the Organization for Economic Cooperation and Development and just about every similarly august institution in predicting a meltdown of the British economy, the effects of which would produce grave repercussions for the global economy. However, since the referendum very few of those have come about, and some recently published indicators suggest the British economy might be doing slightly better than it was prior to June 23.
No wonder the specter of a Britain without the European Union – and a European Union without Britain – has faded in investors' minds. In reality, there probably will be some economic downsides for both the UK and the EU, and their effects might well influence investor confidence globally. It may join the long list of other issues that from time to time spook markets, including slowing growth in China, stagnation in Japan, Greek debt and the over- or under-supply of oil. If that happens, American mortgage rates could still be affected by Brexit, but just a bit.
3. A Whole Lot
There's still plenty of potential for Brexit to become the disaster so many predicted. The referendum was only the start of a long process of disengagement, which is likely to take years to negotiate and complete. A two-year negotiating period will be triggered only when the new British prime minister Theresa May invokes "Article 50," which is an EU treaty provision designed to cover a nation's withdrawal. She's recently hinted that could happen in January or February 2017. And, until that whole process is complete, Britain remains a full EU member. No wonder the UK economy hasn't been affected much since June 23.
Recently, May has been repeating her mantra, "Brexit means Brexit," which is designed to reassure the small majority who voted to leave, but which is essentially meaningless. She can certainly scratch the Dictionary Society of North America from her list of lucrative speaking engagements post-retirement.
In reality, Brexit could mean anything – from very little changing to the UK being completely cast adrift from the EU. So at the very least we're looking at 29 or 30 months of uncertainty, something markets hate. Worse, there are nascent populist movements popping up in other member states of the EU that advocate their countries following Britain's example. It's unlikely but possible that France, Italy, Spain and some smaller EU nations could also withdraw, crippling or destroying the world's largest trading bloc, and sending shock waves around the globe.
That currently seems highly improbable, but certainly not impossible. And it would definitely be undesirable for homeowners. True, you could likely refinance at unprecedentedly low rates, but the implications of a global recession or depression for your job security, pay rates, pension and investments could be horrendous.
What are the ways Brexit could affect homeowners here? Watch this space.