Weekly Rate & Market Update 6-24-16
It’s that time of year, our 5th Annual Flag Collection and Retirement will take place on Friday July1st!
Question of the week: What impact does the Brexit vote have on mortgages?
Answer: Kicking myself a bit as I should have had this question ready to go with a reply and save some time this Friday morning, however I was lazy and didn’t want to pre-write an answer assuming the outcome would be what it was on the Brexit vote.
First, for those not following the international news that closely, what is “Brexit?” Following the modern tradition of mash-ups of couples names, think Brangelina, Bennifer, etc (thought to self, will Leslie go along with Denslie or Lesnis….), Brexit is a mash-up of British Exit.
Exit what? The European Union, which consists of 28 countries, soon to be 27, who operate as a single market allowing free movement of goods, services and people between member nations. Britain joined the pre-cursor to the EU, the European Community, in 1967. In 1991 a new treaty was signed creating the European Union which created the Euro currency—the Prime Minister of Great Britain was able to get an opt out clause for Britain. The new European Union went on-line so to speak in 1993 and the Euro introduced in January 2002.
Yesterday a referendum was held in Great Britain (England, Wales, Scotland and North Ireland) for the people to vote to remain in or exit from the European Union. The final tally was 52% in favor of leaving and 48% for remaining (for numbers folks, differential was 1.3 million for roughly 33.5 million votes cast). Prior to the vote polls were going back and forth as to which side was leading, creating a surprise in the final tally and the substantial win for those punching “Leave” on their ballot.
Britain leaving the EU will obviously impact their economy and that of nations remaining in the association, but will it impact the United States economically and to the question above our mortgage rates—and therefore housing markets?
Yes there will be an impact and it is already occurring. On news of the Leave victory investors began reacting quickly and in large ways selling off European investments, currencies, bonds, stocks. Spilling other markets around the globe we saw equity (stock) markets down around the world, with American stock exchanges currently down from 2-3% (as of 1:00 pm Eastern), having opened down and holding steady on initial losses.
Where does the money go? As I have discussed before in the Weekly Rate & Market Update, when there is turmoil, danger or disaster investors engage in what is known as “flight to quality.” This means they sell volatile investments, like stocks, and purchase safe investments, such as bonds and mortgages for their fixed, and if U.S. Treasury bills and bonds and mortgages practically guaranteed, returns.
This morning our Mortgage Backed Securities (MBS) markets opened with the biggest gap up from the prior day close that I can remember. (Sidebar for those not familiar with MBS. When prices go up, rates go down; prices go down, rates go up. When we open with a large gap up or down then rates will be lower or higher correspondingly.) Why? Money flowing in overnight from the sale of other assets into the safety of the U.S. fixed income markets.
Interestingly is the reaction of lenders to the sudden drop in rates is a hold back on much of the drop for two reasons: first, caution that there is not a reversal when the initial panic of “what now” subsides and calm and rational analysis of the timing of the British exit and impact on markets is better understood. Second, lenders need to control their volume of applications they can realistically process and close within the periods of the rate locks they are accepting. Let’s say you make bicycles and your company can fill an order in 30 days, guaranteed, and your capacity for filling bicycles on the 30 day guarantee is to take in 10 orders per day. You want to have a sale and lower your prices to increase business. How low can you lower your prices to guarantee the 30 day delivery even if everyone works 2-3 hours overtime every day and weekends? Can you handle 15 orders per day, an increase of 50%, 12 orders, 17?
That is the reality of our market the next few days while everything sorts out, a balance between rates and ability to handle the volume of rate locks that will come in as homeowners who were on the cusp of refinancing last week are now seeing it makes more sense.
The initial reaction is usually an over-reaction to any significant event, remember when Golden State blew out Cleveland in the first two games of the NBA and the consensus was the Warriors would coast to another championship? Over-reaction to immediate events.
Moving forward what impact will Brexit have on our industry? It will provide more support for lower rates further into the future. There may be economic ramifications on an already ailing European economy that could exacerbate a recession. Our economy has not exactly been running at high speed growing 1-2% since the end of the recession in June 2009, so any further drop in Europe could pull us down further.
Lower rates should support the housing recovery that has been on-going for many years (median prices in Southern California near the all-time 2007 highs), which has been a major factor in our positive economic growth. With housing inventory currently very low and prices rising lower rates make those higher prices more affordable to more people.
As we watch the unfolding of the aftermath of Brexit the same fundamentals will apply in regards to mortgage rates: when rates are at or near all-time lows do not try to beat the current market and see if you can gain a little bit more. The savings will be incrementally smaller and the risk of a bounce up will show a larger rise in rates than any potential drop. In other words: Lock when you can.
If you want your current mortgage situation analyzed please give me a call and we can run your numbers. When you do so please have ready your current mortgage balance, interest rate and payment (if you have mortgage insurance, taxes and/or insurance included in your payment have that broken down). Or just email me your mortgage statement and I will punch the calculator.
I have many opinions on why the referendum in Great Britain to leave the European Union passed, will not bore those who do not care in this communication, but if you would like to discuss feel free to contact me—I always enjoy engaging with others and their opinions on economic and political issues!
Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.
Rates for Friday June 24, 2016: There was not a lot of other economic news this week impacting mortgage rates—and if there were it would not have the impact of Brexit. Today’s move in MBS markets mitigated drop yesterday as investors hedged against a “Remain” vote, however momentum is for lower rates. For now we are flat from last Friday, and for the third week in a row.
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS
30 year conforming 3.375% Flat
30 year high-balance conforming 3.50% Flat
30 year FHA 3.25% *** Flat
30 year FHA high-balance 3.25% *** Flat
Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages. ***FHA rates have no points and credit towards closing costs, recent rate change reduces credits
I have the annual reminder banner across the top of this communication but know many people read this section of the Weekly Rate & Market Update so want to repeat. Next Friday will be our 7th Annual Flag Collection and Retirement Ceremony. We will be located in the parking lot of Georgie’s Place on the southeast corner of Atlantic and Roosevelt in the Bixby Knolls section of Long Beach. We will be set up and ready to accept you old flag that needs to be retired around 5:30 (if you have a cloth flag that has meaning to you and needs retiring let me know and we may use it in our ceremony). Around 7:30 the scouts from Boy Scout Troop 29 will conduct a flag retirement ceremony, if you have never observed one it is pretty neat to observe—if you have kids this is a great show for them to see how the flag is respected and treated. The ceremony lasts about 15-20 minutes.
Have a great week,
Dennis
