Brexit Drags Mortgage Rates Down, Will They Hit Rock Bottom?

The Brexit aftermath has rattled the stock market and led to decline in mortgage rates. While lower mortgage rates have been affecting retirement accounts, they are helping people seeking to refinance their home loans.

Notably, in the last week of June, the 30-year fixed-rate mortgage averaged 3.48%, down from 3.56% in the prior week. The 15-year fixed-rate mortgage averaged 2.78%, down 5 basis points (bps). Further, the 5-year Treasury-indexed hybrid adjustable-rate mortgage averaged 2.70%, declining from 2.74%.

Following Brexit, the 10-year U.S. Treasury yield, which serves as benchmark for consumer loans, tumbled 24 bps to 1.45%. Sean Becketti, Freddie Mac chief economist stated, "This week's survey rate is the lowest since May 2013 and only 17 basis points above the all-time low recorded in November 2012. This extremely low mortgage rate should support solid home sales and refinancing volume this summer."

Mortgage rates are correlated to the 10-year U.S. government bonds yield. In Dec 2015, the Federal Reserve announced the most awaited increase in the benchmark federal funds rate after more than nine years and had plans to announce four more hikes in 2016. This, in turn, led 10-year Treasury yields to rise followed by mortgage rates.

However, no further hike has been announced by the Fed so far, as it is reconsidering its plans in the wake of the uncertainty prevailing in the global financial market. In June meeting, the rate hike decision was kept on hold as “A U.K. vote to exit the European Union could have significant economic repercussions,” Fed Chair Janet L. Yellen stated. As a result, yields on 10-year Treasury notes plummeted to low levels since 2012.

Moreover, Brexit gave rise to anxiety among investors, compelling them to seek a safe refuge. All this ultimately led to ultra-low mortgage rates which are expected to go down further.

Low mortgage rates can be a boon for the U.S. real estate market. The reduction in home loan rates is expected to give the U.S. buyers some respite.

Though stock prices in the U.S. have bounced back, Brexit impact is expected to stay for a while – which might deal another blow to mortgage rates. Meanwhile, this can perk up housing demand in July, supporting the recovery in the economy.

In spite of the plunge in rates, investors are apprehensive about investing in the housing market, thanks to the volatility rippling through the financial world. However, homeowners seeking lower rates for refinancing are definitely big-time gainers.

"In light of the Brexit vote and other recent economic news, MBA now predicts that the Fed will hike only once this year, likely in December," said Lynn Fisher, Mortgage Bankers Association vice president of research and economics. "If the financial-market disruption from Brexit persists, the likelihood of even a December hike would be reduced" he added. Therefore, such prediction is an added advantage for both buyers and homeowners looking for financial aid at lower rates.

Notably, low rates are expected to spur higher real estate activity and lending as experienced in 2012. Therefore, for mortgage lenders including Bank of America Corporation (NYSE:BAC) and Wells Fargo & Company (NYSE:WFC) , low rates could benefit their consumer and home loan businesses.

Though low rates are a boon for homeowners, mortgage REITs might suffer. When homeowners prepay, investors are forced to reinvest the proceeds in a lower-rate investment yielding low returns. Therefore, rise in prepayments turn out to be negative for REITs, including those with huge exposure to fixed-rate, government-guaranteed mortgages. Such companies include American Capital Agency (NASDAQ:AGNC) and Annaly Capital Management (NYSE:NLY) .

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>

WELLS FARGO-NEW (WFC): Free Stock Analysis Report

BANK OF AMER CP (BAC): Free Stock Analysis Report

AMER CAP AGENCY (AGNC): Free Stock Analysis Report

ANNALY CAP MGMT (NLY): Free Stock Analysis Report

Original post

Zacks Investment Research