Brexit here for your new home: How British politics helps homebuyers

It may seem like there’s no way the affairs of a government half-way around the world could possibly effect home prices in America. Yet, the global economy is nothing if not surprising. That’s why 30 year fixed rate mortgages are plummeting to 3-year lows.

Like everything else involving mortgages, the causes are complex. Basically, mortgages are a commodity like any other. People and financial institutions buy and sell home loans the same way they do stocks or other securities. Institutions with a lot of capital, like retirement fund management companies or brokerage firms, can afford to pay the $300,000 or more that a home seller needs. They’re willing to do so because the return on that capital is going to be more than they put down. They can then bundle the future money they will make on the loan and sell the rights to it to a bunch of different people, or, more likely, bundle that mortgage with a  bunch of others and sell pieces of all of those loans.

For investors, mortgages and mortgage-backed securities represent a fairly safe investment. Default rates for home loans are relatively low, and even if a borrower does default, the loan is secured by real property, which can be resold to recoup the losses. The rate of return isn’t as high as it is with riskier investments, but it’s a very safe investment.

In times of extreme market uncertainty, like in the wake of the Brexit vote, lots of investors want a safe investment. That means they turn to real estate. Suddenly, there’s lots of money available for people to use to buy homes. When supply increases and demand stays the same, prices drop. In the case of mortgages, the price is the interest rate.

That’s part of the price drop. The other side is the prime interest rate. In order to stimulate spending, the Federal Reserve has made credit very cheap for banks. That means those banks make it fairly cheap for their customers, mortgage seekers, to get credit.

These two factors have made for a perfect storm of cheap credit, and it’s well on its way to making a seller’s market. More and more people are looking to buy a  home, which is driving up the price of real estate. Combine that pressure with the across-the-board increase in rents, and real estate values will continue to climb.

That’s how a referendum an ocean away can affect the price of your house, wherever you live.

One thought on “Brexit here for your new home: How British politics helps homebuyers

  • July 9, 2016 at 2:46 pm
    Permalink

    Definitely a new environment we’re in. Could be here for awhile

    Reply

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