Why Brexit Will Produce Record Low Mortgage Rates

Big BenThe quick and easy way to see where mortgage rates are headed in the near term is to look at Treasury bonds. The rate for such securities reached 1.58 percent on Friday, down from 1.74 percent the day before, the day the British voted to leave the European Union.

Around the world markets lost $2 trillion on Friday and Britain went from being the fifth largest economy to the sixth, now holding less economic clout than the French. The British electorate, following in the in the footsteps of Steve Urkel, are now asking, “did we do that?”

Less Wealth But Lower Mortgage Rates

So now we have less wealth, smaller pension accounts, and lower interest rates. As the Bachman–Turner Overdrive told us, you ain’t seen nothing yet….

Among the many questions raised by the Brexit vote is whether our Federal Reserve will discontinue its constant battle to ignore reality and raise interest rates. It was able to push through a December rate increase and since then mortgage rates – which are not controlled by the Fed – have moved lower and lower. Last week Freddie Mac reported that 30-year, fixed-rate prime mortgages were now priced a 3.54 percent, down from 4.02 percent a year earlier.

You can see the disconnect. The Fed is on a mission to artificially raise bank rates while returns worldwide are increasingly in the dumper. More than $10 trillion worldwide is now invested with negative interest. If you have a chance to borrow from a US bank or a lower-cost financial source overseas which would you choose? Since capital moves across borders with total ease, why does the Fed think it alone can raise rates?

The real issue is not what happens in a day or in a few days, it’s what happens in the months and years to come – that’s how long it will take to see the full impact of the Brexit vote. So far we’re off to precisely the start predicted by Brexit opponents and that’s not a good thing.

To A Large Degree Nothing’s Changed

The economic trends which powered the Brexit movement – fewer good jobs, falling wages, more technology change, the movement of jobs to markets with lower labor costs – will simply continue. The savings the British were promised – $350 million pounds a week which would be used for their national health system – were written off within 24 hours of the vote. Little wonder a lot of Brits want a new referendum, they were duped.

A just-released study by the MacArthur Foundation found that 81 percent of us don’t believe “the housing crisis that began nearly a decade ago is over.” That’s a huge number, evidence that the constant stream of glowing economic reports are simply contrived numbers that do not reflect the real-world experience of many Americans.

If the Fed wants a visible economic goal that would be supported by everyone how about working on higher wages? Household incomes today are 7.2 lower than in 1999. This is the central economic fact of our time. It explains why the middle class is shrinking, why basic necessities seem to cost more, and why a lot of adult children are still living with their parents.

If you think Brexit was an awful choice by the British, just remember that something similar can happen here. Just like cash, ideas cross borders with electronic speed, including some very bad ideas.

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