Bye Bye Britain
Well, the unthinkable happened early this morning (or late last evening depending on where you live). The UK voted to leave the European Union, agreeing to Brexit instead of Bremain, as they say. So hold onto your cup of tea, it’s gonna be a bumpy ride.
The initial reaction was one of shock, as most market pundits assumed the referendum wouldn’t pass, similar to the Scottish independence vote last year. But to the surprise of just about everyone, it did. And now the global markets are going haywire, as is the British pound.
Here in the states, the Dow is down about 500 points (3%) as of the time of this writing, the Nasdaq is off nearly 200 points (3.75%), and the S&P 500 has fallen roughly 64 points (3%).
Meanwhile, the 10-year bond yield is plummeting because bond prices are on the rise. Put simply, a flight to safety occurs in situations like this, and safety is U.S. government bonds, not Facebook stock. As a result, the yield drops.
The 10-year yield slipped nearly 10% today, and now sits around 1.57%, it’s lowest point since 2012 when the 30-year fixed hit its all-time low. The 10-year yield began 2016 over 2%, quickly declined, and then saw choppy action ever since.
The good news is that when bond yields drop, mortgage rates also tend to fall because the same investors are interested in both types of securities.
We already enjoy very low mortgage rates today, but shockingly this Brexit deal should lower than even more. We could actually see new record lows because of this.
Are New Record Low Mortgage Rates On the Way?
Without getting too wonky, these global events all pretty much result in the same thing; lower mortgage rates. That’s basically all we need to know, right? Our 30-year fixed mortgage will be lower than it was yesterday because the Brits are stirring things up in the financial markets.
I won’t lie…last night I sat on the couch and dreamt of a 30-year fixed priced at 2.75%. I don’t know if they’ll go that low without having to pay an arm and a leg to buy the rate down, but that remains to be seen.
They’re certainly going to go down, and as mentioned, they were already low to begin with. The most recent Freddie Mac survey had the 30-year fixed at 3.56%. That may have translated to a par rate around 3.625%. Today they might be 3.50% instead.
On a $300,000 loan amount that’s a difference of $21 a month. Yeah, it’s not much and certainly not enough for someone to change their mind about refinancing. But it is another notch lower.
The problem right now is that mortgage rates are already super low, so it gets tougher and tougher for them to fall further. It’s not to say they won’t, it’s just kind of uncharted territory and lenders probably want to be careful here.
We Don’t Know the Implications of Brexit Yet
Another takeaway is that we don’t really know the implications just yet. This literally happened less than a day ago, so for the market to digest it we need to give it some time.
There’s already all types of craziness afoot, such as the prospect of Scotland trying to gain its independence again. Or Northern Ireland reuniting with Ireland. Or other European countries leaving the EU.
The list goes on and on here – Brexit may have set a huge precedent for other countries, giving them real belief that they can make similar unheard of moves. And all that uncertainty generally means lower interest rates. Sweet.
That being said, it could make sense to keep a close eye on mortgage rates, but maybe not lock one in today or even apply for a refinance this week or next.
You might be disappointed if you call your mortgage broker today, expecting some kind of fire sale on mortgage rates. But that might change over the course of a month or several months.
We very well could be entering a period of great volatility and mortgage rates might reach new depths. The thing to remember is that lenders are generally hesitant to just slash rates overnight.
What if the markets decide that Brexit isn’t actually that terrible, and in fact, it’s going to be okay? That it’s all blown out of proportion.
These seemingly momentous events tend to work themselves out and the media often forgets about them and moves on to something else within a couple weeks, months, etc.
At the end of the day, mortgage lenders don’t want to get hung out to dry if rates swing too far too quickly in one direction. Instead, we might see measured downward movement for the foreseeable future, but it could take weeks or even months to pan out and really get good.
In the meantime, I’ll keep dreaming of a 30-year fixed in the 2s…