The following article was penned on Friday by Robert Holman with the Ohio Association of Independent Land Title Agents. This marks a day in history for this blog, it is the first time another's writings are reprinted here. That being noted, as is always the case in these situations, find your most trusted source of fact-driven news and keep paying attention. This article will try to help explain what it might mean for a title professional.
What Just Happened?
Yesterday, Great Britain (aka England, the United Kingdom, etc.) voted to leave the European Union (EU). The EU is a connection of 28 European economies that “promotes security, peace and stability by operating as a free-trading marketplace without customs duties between borders and without restraints on EU immigration.” The divorce from the EU will take the next 2 years to sort out, but the consensus is that it will be messy. The EU, which normalized economic, diplomatic and monetary policy across the vast majority of Europe, is now on the brink of wider collapse. The UK is one of the largest and most important members of the EU. With its decision to leave the EU (known colloquially as “Brexit”), the UK will now rely upon its own currency (the pound) and its own set of economic policy and standards in commerce. Other nations that remain in the EU will cling to that organization unless further referendums to leave emerge. The short term economic and political future for all is murky at best.
Why did the UK leave the EU?
Two reasons are high on the list. First, it has much to do about immigration issues and nationalism. The EU permits a relatively free-flow of immigration across EU member nations. If you were born in the UK and wanted to work in Geneva, Switzerland – for instance -- because there were better job prospects in that country, membership in the EU allowed you to live in Switzerland as a UK citizen without overly-rigorous visa requirements. The EU has been a wonder for companies who do work in different countries across Europe as it settled long-standing disputes over trade, commerce and security. However, recent world refugee events (Syria) and terrorist actions in France and Belgium (ISIS) have soured the immigration mood in Europe. Despite the recent vintage of terrorism, these immigration debates are long-standing issues in Europe and throughout the civilized world. As you know, we have the same drumbeats here, as well.
The second reason for exit is economics. During the Great Recession and the collapse of several European economies, like Italy, Spain and Portugal in 2008, much of the tight fiscal policy restraints that were borne from the recessionary ashes were “iron-fisted” by the richest governments from within the EU (i.e. Germany, the UK, etc.) against the poorer states within Europe. Those countries demanded that the poorer countries in the EU take harsher steps to rein in spending and reduce their debts while the same was not always true in the “richer” European states. These were called “austerity” measures and Europeans hated them. Many critics of the EU felt that it was unfair that Germany, for instance, should have so much to say about how Spain spent its money. While the UK went along with many of the austerity requirements, they were vocal critics of German domination of the EU. The UK and Germany have a VERY long history of mutual distrust. The recent economic issues helped refuel a simmering level of national animosity towards one another.
You remember those two world wars from the early to mid-20th century? That was the last time these two didn’t see eye-to-eye when nationalistic fervor combined with economic stresses. Thus, the reason for concern.
What This All Means to You as a Title Agent?
Global financial markets are in a full-scale selloff as a result of the UK exit. We can expect the next few weeks and months to be very bumpy on the U.S. Stock Exchange and markets throughout the world. This morning, the yield on the 10 year treasury note – which ties itself to the 30 year mortgage interest rates we all rely upon – fell 25 basis points in early trading! The exclamation point is needed here because that is a historically huge drop. The rate will rebound – which it has today -- and fall –which it will throughout the coming days and weeks, but expect volatility and here’s why: when investors look for safe investments, they flood the 10 year treasury note and buy U.S. debt because it is considered a safe investment. When they do this, the yield on that debt falls. When the 10-year yield goes down, the 30 year mortgage interest rate goes down in corresponding fashion. If this cratering keeps up, 30 year mortgage interest rates are going to fall to historic lows.
And that’s where you come in.
It is a complicated path to the next refinance boom and nothing is certain here, but falling interest rates are going to cause mortgage rates to fall. Falling interest rates are going to encourage those with 4% mortgage interest rates to go for 3% interest rates. Those with 3% interest rates may have the ability to target even lower rates. How long this lasts? Anyone can guess. Rates are likely to fall, though.
Here is a story from the Washington Post from today that helps explain the mortgage rate relationship: https://www.washingtonpost.com/news/get-there/wp/2016/06/24/how-brexit-could-push-mortgage-rates-to-historic-lows/
It all depends upon the severity of the yield decrease. And as long as the American economy does not join its European compatriots on the pathway to recession, we could be in for a very robust cycle of mortgage activity. However, again, it all depends upon how well insulated the European economy is from ours and how clean the UK exit is from the EU.
There is room for concern here. There is also room for some optimism in our marketplace.
-- /Robert Holman ---
I wanted to share this article with you as I found it timely and interesting. It also shows how quick the OAITA can be to share useful information.