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Brexit: What Is It and Why Does It Matter?

The United Kingdom’s exit from the European Union isn’t scheduled until next year, but Brexit is dominating headlines in 2018 as a key deadline to formalize a withdrawal agreement quickly approaches.

In October, EU officials are scheduled to meet with U.K. leaders to hammer out the agreement and issue a statement on future relations. Because there are so many unknowns, there is a lot of speculation over what the agreement will entail and how it will impact the global economy. What’s heightening the insecurity is the fact that a divided British Parliament can’t seem to agree on what the deal should look like, creating the potential for economic and political chaos on both sides of the English Channel.

And since there’s no certainty that an agreement will be reached, according to a recent European Commission report, many in the United States are concerned about how this will affect everything from a fluctuating U.S. stock market to higher (or lower) mortgage rates.

What is Brexit?

The European Union represents a coalition of 28 European countries, including Germany, France and Greece. It was formed (albeit in a different form, then called the EEC) after World War II as a means of creating economic interdependence between the nations, with the idea that this would help avoid future conflicts.

The United Kingdom, which is comprised of Wales, England, Northern Ireland and Scotland, joined the EU (formerly the EEC) in 1973. As a member, the U.K. agreed to various treaties and agreements that align duty and tax rules with the rest of the EU members, and took part in the coordination of economic policies meant to help maintain economic stability in the eurozone.

In 2016, a number of factors prompted the U.K. to hold a referendum on potentially leaving the EU. Some of the issues that precipitated the “British exit” — Brexit for short — included Britain’s desire to make its own laws, and the cost of immigration. Of the more than 30 million people who voted, 51.9% voted to have the U.K. separate itself from the agreements enforced by the EU.

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Brexit: Impact 2 years later

It’s been two years since the Brexit vote, and since that time, the U.K. has begun negotiating its terms of exit with the EU. With two summits set to take place later this year — including October’s meeting — decisions on trade and access to European markets are still up in the air, which has an effect on global markets. The insecurity of the unknown may also impact business owners who don’t know how Brexit will influence access to laborers, regulations and taxes or the value of the pound. All of this unease can trickle down to employees, reducing money spent on travel and tourism and consumer goods — all of which could impact the U.S. economy and, indirectly, the housing market.

In addition, the U.K. is looking at another year or more of transition (which is not expected to be final until December of 2020). It’s not until after that date that the U.K. and the rest of the world, will see how Brexit impacts the remaining EU countries and the U.K.

In the U.S., that can often mean short-term volatility in the stock market, which impacts portfolio performance and can result in people having less money available for a home down payment or having less confidence in making a new home purchase. This is especially true for U.S. investors involved in equities or mutual funds with exposure in the U.K. or the eurozone.

How has Brexit affected U.S. mortgage rates?

Following the Brexit referendum, 30-year home mortgage rates in the U.S. responded by falling to their lowest level since 2013.  “I think it was initial shock around the Brexit vote, which was surprising to the markets,” said Tendayi Kapfidze, chief economist at LendingTree. “There was a big decline in Treasury rates, which led to some decline in mortgage rates.”

The same seemed to hold true for U.K. markets, which hit some bumps of their own. Since then, however, the country has benefited from increased export growth, and consumer spending is expected to accelerate, although this recovery may be short-lived. A July 2018 report from the International Monetary Fund (IMF) projects that Brexit will negatively impact the U.K.’s economy for the long term. This is in part predicted because of the overall benefits the U.K. enjoyed as being part of the EU. In addition, the IMF raises concerns over the long-term negative impacts on output and jobs due to an expected higher barrier to trade, capital and labor.

Still, the temporary dip in U.S. mortgage rates brought on by the initial Brexit vote had a fairly significant impact on the U.S. housing market. ATTOM Data Solutions found that 2016 mortgage loan originations, which include refinances, home equity lines of credit and purchases were at their highest total since 2013, a time when the United States was still recovering from its Great Recession.  

The future of Brexit and U.S. mortgage rates

The Brexit referendum was held in 2016, but Brexit Day, the day that the U.K. officially exits the EU, isn’t scheduled until March 2019. What can we expect then? According to Kapfidze, probably not much. “Brexit is not a surprise anymore, so it won’t shock broad markets,” Kapfidze said. “The average homebuyer or borrower should not be worrying about that.”

A 2016 report by the U.K. advisory and accounting company Deloitte notes that one change we can expect in the U.S. is for commercial real estate investors to face increased competition and rising prices, brought on by an influx of foreign investors as they look for safety outside the EU and the U.K.

World economic events can have an unexpected impact on your finances, which can, in turn,  influence your decision to buy, sell or access equity in your home. While the remaining steps for finalizing Brexit are unlikely to have a huge impact on mortgage rates here in the U.S., the uncertainty they usher in may play a role in general volatility for portfolio values, home prices and mortgage interest rates.


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