The Brexit decision continues to reverberate and Freddie Mac, in its current issue of Outlook sees it as both a plus and a minus for the U.S., and not necessarily a short-lived one. The company's economists predict it will raise global risks while keeping domestic mortgage rates near historic lows. That, in turn, will raise mortgage originations.
Brexit aside for the moment, for the second time in as many months Freddie Mac raised its estimate for the first quarter 2016 Gross Domestic Product (GDP). Its initial estimate of 0.5 percent growth had previously been revised to 0.8 percent and now to 1.1 percent. Upward revisions to growth in exports and nonresidential fixed investment were primary drivers of the revisions and the report says this newest figure suggests the start of 2016 was not as bad as originally thought.
The expectation for the second quarter is growth of 2.0 percent with consumer spending being instrumental. That factor had a growth of 1.1 percent in April then normalized in May at 0.4 percent. Retail sales continue to be strong, growing by 0.5 percent in May. However, building materials sales have declined for three straight months which signals a slowdown in residential investment.
Going forward, Brexit is expected to have a major impact on domestic production. A slowdown in global growth, especially in Europe will dampen demand for U.S. exports as will an expected increase in the value of the U.S. dollar as foreign investors seek a financial safe haven. The price of riskier assets will also fall somewhat, raising capital costs and delaying investment
All-in-all, Freddie Mac sees the impact of Brexit shaving 10 basis points off of the GDP from the second quarter of 2016 through the end of next year. After the upward revision to Q1 this will mean this year's GDP outlook will be unchanged at 1.9 percent and the 10 basis point reduction will shave the 2017 GDP down to 2.2 percent.
The Federal Open Market Committee (FOMC) backed away from raising the fed funds target rate as they were expected to do at their June meeting after a very weak May jobs report. After the results of the Brexit vote on June 24 Freddie Mac anticipates the FOMC "will likely continue to express caution before easing monetary accommodation."
The Monday after the United Kingdom vote 10-year Treasury rates fell below 1.5 percent for the first time since July 2012 and Freddie's Primary Mortgage Markets Survey put the 30-year fixed-rate mortgage (FRM) at 3.41 percent this past week, the lowest since May 2, 2013.
In light of this, the company has lowered its 10-year Treasury rate forecast by 40 basis points to 1.8 percent this year and 2.3 percent in 2017. The outlook for the 30-year FRM has accordingly been reduced by 30 basis points for 2016 to 3.6 percent and by 50 basis points in 2017, to 4.0 percent.
These lower rates should boost housing activity, especially refinancing and the economists expect the refinance share of originations this year will be 49 percent, 8 percentage points higher than predicted a month ago. This translates to about $100 billion more in originations, bringing the total to $1.8 trillion. The interest rate forecast, the company says, reflects its belief that, "The impact of Brexit isn't strictly a short-term disruption, but rather it will have a lingering effect on the housing market. Thus, we have increased our forecast of 2017 originations to $1,550 billion."
