Much has been said over the past few weeks about how Britain’s abandonment of the European Union will impact the financial sector, foreign policy, and international trade relations. But one area that many experts aren’t discussing is how this event will impact the US housing market. What many people don’t realize is how international our economy truly is, and the repercussions (both positive and negative) of Britain’s monumental decision will be felt across all sectors – especially in US real estate. Here’s why:
- Interest Rates Are at All-Time Lows: Regardless of your opinion on Britain’s decision, one thing remains certain – uncertainty. Great Britain, the 5th largest economy in the world, now has to re-negotiate all of their international trade agreements. To complicate things even further, London is widely considered to be the financial capital of the world, and a bulk of these “trade” agreements involve financial assets (stocks, bonds, mortgages). All that said, there are a lot of variables at play, and no one is quite sure what’s going to happen. Many investors, worldwide, recognize this as a considerable risk and are moving money into safer investments, namely treasury bills, which are directly tied to interest rates. This high demand for treasury bills, both in the US and abroad, is forcing rates down, which subsequently impacts interest rates across all sectors. Traditional 30-year fixed mortgage rates can be found as low 3.33% – an unprecedented low. The Federal Reserve’s plan to raise interest rates in 2016 is again on hold – at least until after the November elections.
- Home Values Will Continue to Rise: With interest rates at an all-time low, home values will inevitably rise. As mentioned above, a 30-year fixed mortgage can be found for as low as 3.33%. To put things in perspective, the average mortgage rate since 1985 is about 7%. On a $200,000 home in Central Ohio, that equates to a $400 per month (25%) savings! To look at it from a different angle – a family living in a $400,000 home locked into a 7% interest rate, can now purchase a $500,000 home, and their monthly payment will be exactly the same. Sounds like quite the bargain, right? Well, in the short term this may be the case, but as homeowners start to take advantage of this great deal, demand, and thus prices, will inevitably rise, taking the free market back to its point of equilibrium.
- Real Estate Investors are Flocking to the US: For decades, London has been the quintessential city of international real estate investing. Many wealthy investors in places like China and the Middle East, where currency and real estate is highly volatile, seek some sort of stability. In 2013, over 75% of homes bought in London were purchased by foreign investors. However, with Britain leaving the EU, there is a lot of uncertainty in British real estate. Experts anticipate many of these investors pulling their funds out of London, and moving to other cities, specifically in the US where, which is viewed as more stable. We anticipate to see the most growth in places like New York, Philadelphia, Seattle, and even Columbus Ohio. This increased demand in US real estate will inevitable drive prices higher. And despite the negative repercussions of foreign-controlled real estate, homeowners are likely to reap the benefits of increased home values.