The Future of Mortgage Rates in a Post-Brexit World

Up, up and away

Light at end of tunnel

Near the end of June, Brexit came, then it went and, according to Capital Economics, that’s where the story ends.

No more effect on the housing market, no more lowering the mortgage rates, according to Capital Economics.

In fact, this week, the 30-year fixed rate mortgage edged upward, and the 10-year Treasury yield rebounded sharply, according to Freddie Mac’s Primary Mortgage Market Survey released Thursday.

“The downward pressure on mortgage interest rates from Brexit already appears to be unwinding, with 30-year fixed rates increasing last week from 3.60% to 3.65%,” Capital Economics Property Economist Matthew Pointon said.

“Given we expect Brexit will have a minimal impact on the U.S. economy, we see no reason to change our forecast for mortgage rates to reach 3.85% by the end of this year, and 5.0% by the middle of 2018,” Pointon said.

Previously, Capital Economics claimed that the Fed would raise rates faster than the markets currently expect. In fact, they said that by the end of next year, rates could increase at least 1.75% to 2%.

Goldman Sachs previously predicted GDP growth at 2.25%, however after the Brexit vote, the company revised its prediction down to 2% for the year. It also predicted that the Fed will raise rates just once this year, instead of its previous prediction of twice.

“Looking ahead, we expect treasury yields will rise as inflationary pressures force the Fed to act more aggressively than many expect,” Pointon said. “But set against that, with the economic uncertainty caused by Brexit smaller than feared, mortgage spreads will also drop back from current highs.”

“Indeed, the spread fell back last week to 206 basis points,” Pointon said. “Overall, while mortgage rates have been a bit lower over the past three weeks due to Brexit, we see no reason to change our view that they are set to rise gradually over the next couple of years.

Click to Enlarge

CE

(Sources: Thomson Datastream, MBA, Capital Economics)

Mortgage applications reported weekly by the Mortgage Bankers Association Weekly Mortgage Applications Survey demonstrate the diminishing effect of Brexit.

Before the U.K. voted to leave the European Union, mortgage applications went back to the previous downward trend and declined2.4% from one week earlier despite record low interest rates, according to the MBA survey.

Then the U.K. voted to leave the European Union and mortgage applications surged 14.2%, significantly driven by refinance activity, according to the MBA.

The next week the trend continued as mortgage applicationsincreased by 7.2% from the previous week, according to the MBA.

But this week purchase applications actually surged in the latest report, rising 23% compared with the previous week.

Even when Brexit pushed rates lower and applications soared, purchases application only rose 4% from the previous week.

Meanwhile, this week saw declines of 1.3% in mortgage applications, according to the MBA report.

On the other hand, minutes from the Fed’s June meeting showed that Fed officials chose not to raise interest rates since they didn’t yet know if the U.K. would be leaving the European Union. Now that they have, it could cause the Fed to continue to hold off on raising interest rates.

In fact, Federal Reserve officials are looking at raising rates by the end of the year, possibly as soon as September, according to an article by Jon Hilsenrath and Michael Derby for The Wall Street Journal.

On the other hand, some companies disagree, seeing the Fed take a very conservative stance on raising rates.

“Our view on interest rates continues to be ‘low for long’ as we believe a Fed decision to raise interest rates will likely be on hold until June of 2017,” Fannie Mae Chief Economist Doug Duncan said.

“Brexit’s economic impact on the U.S. will likely be limited, especially from a trade perspective, and should be a near-term positive for the housing and mortgage market as falling mortgage rates have prompted new refinance demand,” Duncan said.

Many experts speculated on what Brexit would do to the economy, however, Britain’s housing market now seems to be business as usual.

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