Brexit Direction Sign on a blue background

The residential real estate market posted strong numbers through May of this year and pending sales for June are looking strong. With inventory creeping up and interest rates at three-year lows thanks to the fallout from the Brexit vote, the second half of 2016 could be poised to finish even stronger than the first.

“Financial markets reacted severely to the Brexit, with Treasury rates dropping about 20 basis points initially,” Mike Fratantoni, chief economist of the Mortgage Bankers Association, said in a statement on the Monday after the vote. “At this point, it is unclear whether this will just be a short term disruption, or whether it will have a longer term impact. Our best guess at this point is that the impact on the mortgage market will be to keep mortgage rates lower for longer, likely leading to another pickup in refinance activity,” and rates continued to slide after that.

Thirty-year, fixed-rate mortgage rates have dropped about three-quarters of a percent since the U.S. awoke to the results of the referendum, said Shant Banosian of Guaranteed Rate, which translates to $25,000 or so of additional purchasing power, depending on the price of the house. Banosian said some of the jumbo lenders have not dropped their rates because they’re already historically low.

“The vote caught everyone by surprise,” he said. “The 10-year Treasury bill reacted worse than it did on the day after 9/11. We’re back down to all-time lows. We’re pretty close to the floor, but if another country votes to leave the EU, that could cause another panic.”

Mike Kemple, senior vice president of Bridgewater Savings Bank, said mortgage rates have been falling all year – the Brexit vote simply put an exclamation point on it.

“In 2015, 30-year, fixed-rate mortgage rates averaged 3.9 percent,” Kemple said. “Last year Freddie Mac projected rates would average 4.4 percent in 2016. Now they’re projecting rates will be level with 2015. Now they could actually wind up lower. None of us were expecting that.”

Low Rates Drive Prices, Sales Up

Last December, Jonathan Smoke, chief economist for Realtor.com, said he expected residential real estate sales in Greater Boston to increase 10 percent and prices to increase 6 percent in 2016.

So far, statewide single-family home sales are up by 28.2 percent over last year and prices are up 2 percent over 2015, according to data from The Warren Group, publisher of Banker & Tradesman. Will fallout from Brexit give prices the boost they need to meet Smoke’s prediction?

The uncertainty created in the financial markets by large, unexpected events, like acts of terrorism or the Brexit vote, sends international investors looking for a safe place to put their money. The U.S. 10-year Treasury note is considered one of the safest investments in the world – the more dangerous the world seems, the more people invest in T notes, and that drives interest rates down. It can also drive prices up.

“As money gets cheaper to borrow, people are going to make aggressive offers because they can afford to borrow more,” Banosian said. “Bidding wars usually slow down in the summer, and we’re not seeing them slow down at all. Low rates are a great way to keep the housing market going.”

But low rates don’t help everyone – “the problems of a first-time homebuyer are not solved by lower rates,” Kemple said. “It’s a boon to people who can shorten loan terms or consolidate some debts. To help first-time homebuyers, we need more homes to sell.”

Markets across the state are seeing that needed increase in inventory and now have at least a month or two of inventory, said Mark Lippolt, senior vice president of operations at Hammond Real Estate.

“I wouldn’t be surprised to see slight increases in inventory during the second half of the year,” he said. “As prices increase to near-record levels, there will be homeowners who opt to cash out or who use their increased equity to leverage a trade up property.”

Banks Buried in Business

Banosian said the purchase market has been strong all year, but Brexit reignited the refinance market. Together, they’re keeping banks so busy, he said, it’s extending loan closings.

“Lenders are at their limit in terms of volume, Banosian said. “The low rates have started a refinance wave during an already busy purchase time. The system is at its maximum capacity. At some point, banks might not be able to close in 30 days and that will make it hard for people to compete with cash buyers.”

Kemple said it’s still too soon to be confident about what the impact of Brexit will be or how long it will last.

“I have advised my loan officers to expect that this will be over quickly,” Kemple said. “But you could easily make the argument that the vote exposed some deep weaknesses in Europe that won’t be resolved even if the U.K. recants. Europe is weaker than we thought.”

And there is uncertainty at home as well as abroad.

“Between now and the election in November, you could forecast a level of uncertainty that continues to support very low mortgage rates,” Kemple said. “Mortgage rates thrive on very low certainty. Most of us now believe that additional rate increases by the Federal Reserve are off the table for the rest of the year.”