The United Kingdom Friday voted 52 percent to 48 percent to leave the European Union—the much anticipated, but also much feared “Brexit”—in a move that has had immediate effects on global and American markets.
According to Bloomberg, selloff triggered by anticipation of the U.K. leaving the European Union has caused U.S. stocks to tumble the most since February‒‒385 points off the Dow Jones Industrial Average, though assurances of assistance from the Fed reportedly kept the Dow from dropping more than 500 points.
The Federal Reserve issued a statement early Friday saying it is “carefully monitoring developments in global financial markets, in cooperation with other central banks” as a result of the U.K.’s vote.
“The Federal Reserve is prepared to provide dollar liquidity through its existing swap lines with central banks, as necessary, to address pressures in global funding markets, which could have adverse implications for the U.S. economy,” the Fed announced.
The U.S. Treasury’s Office of the Comptroller of the Currency took a nearly identical stance.
“The OCC routinely works with the banks it supervises to ensure bank management understands the unique risks facing their banks, and that they have established the appropriate risk management controls to identify and react to a variety of emerging concerns and contingencies such as this. We also communicate and coordinate with other regulators as warranted,” an OCC spokesperson said.
Curt Long, chief economist at the National Association of Federal Credit Unions, said that for the U.S. economy, the Brexit will at the very least lead to increased volatility in financial markets.
“Fed action is likely on hold until the fourth quarter at the earliest,” Long said. “As for credit unions, they should prepare for the present interest rate environment to persist for some time as normalization is bound to proceed on an even more gradual path than the Fed has previously indicated.”
Credit unions are also likely to see a repeat of the second half of last year when market volatility led to a surge in share growth, he said.
“Mortgage rates will tumble following the Brexit vote, possibly hitting new record lows.”
Greg McBride, Chief Financial Analyst, Bankrate.com
Not everyone, however, is painting the Brexit as a negative. American homebuyers, for instance could make out well, according to Greg McBride, chief financial analyst at Bankrate.com.
“Mortgage rates will tumble following the Brexit vote, possibly hitting new record lows,” McBride said. “If you're a borrower, don't wait to lock your rate, as this opportunity may not last long.”
Mark Fleming, chief economist at First American Financial echoed the idea that the Brexit will likely benefit Americans in search of a mortgage.
“The housing market continues to benefit from low, and even falling, mortgage rates driven by the ‘flight to safety’ and relative yield that is maintaining demand for U.S. 10-year Treasury bonds, which underpin fixed-rate mortgages,” Fleming said. “The 30-year fixed rate mortgage has been below 5 percent since May 2010—six years for a variety of reasons, but ‘Brexit’ has played an influential role in the recent trend in rates. This era of low rates has fueled increases in consumer house-buying power, keeping real house prices low by historic standards."
This week’s Primary Mortgage Market Survey from Freddie Mac showed average fixed mortgage rates largely unchanged from the week ending June 18. Rates for 30- and 15-year fixed mortgages averaged 3.56 and 2.83 percent, respectively, and were both up by half a percent from last week. Fifteen-year Treasury-indexed hybrid adjustable-rate mortgages also remained largely flat at 2.74 percent. The result, according to the latest Market Composite Index report from the Mortgage Bankers Association (MBA), was a 2.9 percent jump in mortgage applications
Doug Duncan, chief economist with Fannie Mae, reiterated that mortgage rates will almost surely drop, but reminded that the Brexit is a unique event and that the effects will not be instantaneous.
“This will play out in process and revealed impact over the successive months and years,” Duncan said.
However, he added, “The fact that the Federal Reserve has referenced the potential exit of the U.K. from the EU as a risk factor affecting the decision on the direction of US monetary policy means the Fed will very likely be on hold for some time as it observes the impact on US and global financial markets and economic activity.”
Five Star Institute President and CEO Ed Delgado said, “It's best to exercise calm before prognosticating the long-term effect that last night's vote will have. The truth is that we really don't know what the success of the Brexit movement means for the world economy or the United States housing market because of the unique nature of the event," Delgado said. "As has been the case following most catalyst events throughout history, we are likely to see some market volatility in the short term. The Fed has vowed to be a stabilizing force and, if nothing else, Brexit likely ensures that the central bank will keep interest rates at their current level for the next several months.”
Delgado continued, “Credit availability remains a grave concern as homeownership rates continue to languish at levels not seen in nearly a half century. Whatever the effect the decisions in Europe may have, we must not relent in our work toward ensuring that homeownership is an attainable dream for the next generation of Americans.”
Editor's Note: The Five Star Institute is the parent company of MReport and TheMReport.com.