As you may know, Friday was a tumultuous day in financial markets with the Big News about “Brexit”. There was a shocking British vote to exit the European Union (EU), which sent the stock market lower and pushed down treasury yields, effectively improving rates.
The other economic news in the week had little influence on markets. As a result, mortgage rates ended near the best levels since early 2015.
While the final polls ahead of the vote were close, the vast majority of investors expected the UK to vote to remain in the European Union. When the outcome indicated that the UK will exit the EU, the resulting uncertainty caused investors to swiftly shift to safer assets on Friday. Global stock markets sold off sharply and bond yields declined, including mortgage-backed securities (MBS). Since mortgage rates are set based on MBS prices, mortgage rates moved lower.
The British exit (Brexit) is expected to result in slower economic activity. The degree of this is difficult to predict. The uncertainty is heightened by the prospect of other countries in Europe proposing similar referendums to leave the EU. It is likely that European trade will be hindered by higher tariffs, companies will be more hesitant to hire new workers, and investors will be slower to commit capital to the region. However, this was viewed as positive for mortgage rates, since slower global economic growth reduces the outlook for future inflation.
In the U.S., low mortgage rates have contributed to healthy housing market activity. Sales of previously owned homes in May rose to the best level since 2007 (this occurred despite a low level of homes available for sale). Strong demand and low supply pushed the housing market to two records in May. The median price of homes sold rose to the highest level on record, and the days on the market fell to a record low of 32.
Looking ahead this week, the reaction to the British vote will continue to influence markets, and we will start to see the true effect it MAY have on interest rates. Mortgage markets will close early on Friday in observance of July Fourth.
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