Why UK Vote Is Likely To Boost US Home Sales

Why UK Vote Is Likely To Boost US Home Sales

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Thanks Brexit!!

While the U.S. residential real estate market seems far removed from the British referendum to exit the European Union, there is no doubt that the big news from across the pond will have an impact. 

The net effect will depend on location and price point, but overall, theBrexit will likely result in continuing growth in home sales with somewhat slower growth in home prices. The impact will benefit well-qualified buyers the most, and it will be a boon for sellers in affordable markets and price points.

The residential real estate market was already well on its way to its best year in a decade when last week's vote in the UK turned out to be the latest instigator of financial market drama in this five-year housing recovery. (Prior situations included the debt-ceiling debacle, the U.S. government shutdown, Greece, and last year's slowdown in China.)

Despite weakening U.S. economic growth in 2016, home sales this spring have been the best in a decade thanks to pent-up demand, positive demographic shifts, and lower mortgage rates.

We've already seen an immediate impact of Brexit on the mortgage market as the event triggered major declines in rates. The average 30-year conforming rate is around 3.5 percent, the lowest in more than three years and very near the lowest average rates recorded in late 2012.

Lower rates produce lower monthly payments. And the decline in rates means that the well qualified can afford an 8-percent higher price than they could at the beginning of the year. That increase in buying power is more than offsetting the impact of higher prices.

While the bulk of this year's pent-up demand is coming from strong demographics supporting large numbers of first-time buyers, move-up buyers, and retirement buyers, another source of demand increase is individual investors. Those investors, mainly wealthier and older households, are looking at single family rentals as a reliable alternative to income and asset appreciation compared to more traditional financial investments that currently leave much to be desired.

The Brexit-induced drop in interest rates of all types only heightens this interest.

But not all parts of the residential real estate market will strengthen as a result of Brexit. Demand could soften in specific markets and segments that will be most negatively impacted by the economic difficulties coming from the U.K. tailspin.

The U.S. economy will now likely see a bit less growth than had been expected for the year as the energy sector and manufacturing are impacted by a lower price of oil and a stronger dollar. 

Likewise, the stronger dollar will likely lead to further softness in international buyers, particularly in markets where the U.K. buyers are strong such as Los Angeles, Orlando,Fla.; New York; Miami; and Tampa, Fla.

Another challenge is the result of lower rates on already-tight credit access. We have already witnessed that credit access has been declining as mortgage rates declined this year. Lenders have become more risk averse as their profit margins have thinned, brought on by the double whammy of lower rates and higher origination and servicing costs.

Furthermore, lenders face lower risk on refinances, which will once again surge as borrowers capitalize on the low rates.

The tighter credit environment limits the first-time buyer pool and favors those who can avoid financing altogether, or those who have excellent credit and can afford to put down 20 percent or more. That gives individual investors an advantage over younger buyers. And both types of buyers tend to look at similar, more affordable properties.

Finally, we're likely to see weakness at luxury price points as long as the financial markets react to the uncertainty with lower stock values.

According to the 2015 Home Buyer and Seller Profile Report from the National Association of Realtors, 20 percent of last year's buyers sold stocks or used retirement funds for their down payment. Declines in portfolios will likely disrupt sales and closings, especially at higher price points as long as stocks decline. If we then see stock indices recover, the effect should diminish.

We are just on the cusp of entering the seasonal inventory inflection point for the year that sees inventories continue to build right when the age of inventory begins to increase. This happens as sellers who decided to list late come onto the market right when pace of sales slows down from its busiest time of the year. 

This year we are likely to see greater variation in the trend as more affordable price points and more affordable markets continue to see very strong demand while more expensive markets and higher price points see some softening and the opposite trend in inventory growth (more in higher price points and less in lower price points).

The net effect will likely be slightly slower price appreciation but consistent growth in sales. From a volume standpoint, we should indeed end up with the best summer since 2006.

The winners in the real estate market are getting a boost from Brexit. Sellers in the right locations and price points will continue to have the upper hand as investors and first-time buyers fight for limited inventory. Well-qualified buyers will be able to capitalize on historically low mortgage rates. And developers and builders should be able to take advantage of those lower rates to line up land and lots to fuel more inventory expansion down the road.

Commentary by Jonathan Smoke, the chief economist for realtor.com

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Dated: July 1st 2016
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