How does BREXIT affect the US housing market?

[Juan Diaz]

The short answer is: not much. We’re in the housing market. The housing market has never been a leading indicator of the economy, so even if the housing market does feel some negative effects from the UK’s Brexit, those shocks will take a little while to make their way down to the housing market. Heck, these shocks might not even end up having any negative effect on the housing market. Let’s take a look to examine:

• On June 23, United Kingdom voters decided to leave the European Union by a slim but decisive margin. This vote is non-binding but it’s about 90% odds that the UK leaves the EU
• The UK leaving the EU is a big deal because the UK removes itself from the largest free-trade bloc in the world. That’s why the financial markets are spooked.
• The UK will likely face economic collateral damage because of this vote, but we don’t know whether these jobs/GDP will be completely lost or just transferred over to Europe
• The financial markets hate uncertainty, and they did not predict a Brexit, so they’ve lost a good chunk of value, something around 5-6% for the average US index fund.
• The US exports about $56 billion worth of goods to the UK every year, which is something like 3.8% of the total exports from the United States. The UK is a good trade partner, but not an essential one.

That’s it. Looking at those facts and that breakdown, if you’re investing in the United States, there’s not a lot that’s going to affect you. If you’re in the UK, it’s a different story. So how and why is it worth looking to for the USA?

For investors in the United States it’s worth keeping an eye on only as it affects the global economy. The fears here, as with the European debt crisis, are of global contagion spreading and Europe and then the world plunging into another global recession. Investors are a jittery bunch, who have a habit of not wanting to lose their money so they try and price this risk into the stock market, whether or not this price is accurate. Hence the sudden 5.6% drop in the S&P and the Dow.

So the market has priced in the risk. Now, how does this affect us going forward as real estate investors? It’ll hit us in a few ways, but I believe we’ll be largely unscathed.

• Wealthy home buyers are likely to be spooked. They’re much more exposed to global economic downturns than the average Joe Schmoe, so if you’re selling to an international upper-class clientele, especially those that work in finance, things might be a little slow until this crisis settles down.
• This could be another Greece. We’ll hear the news stories about how crappy things are in the UK, and then the financial markets will forget about it after a few months.
• On the other hand, if this does develop into that global recession people have been fearing, we do have a few leading indicators to watch out for.
• Keep your eye fixed on the Dow and the S&P. These are pretty good barometers for the future of housing. The S&P peaked around October of 2007, and at least in the Bay Area, housing peaked in the summer of 2008. Housing markets should lag at least a couple months behind the S&P.
• One of the silver linings to this is that feds won’t raise the interest rate any time soon. Keep those loans cheap and easy to inflate the housing market!

So there you go. Based on those reasons, I believe that we’re in safe waters for the moment, but leading indicators like the S&P and the Dow are definitely worth keeping an eye on.

Safe investing!

Juan