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posted on 27 June 2016

What 'Brexit' May Mean For The U.S. Real Estate Market And The Rest Of The Economy!

by Michael Haltman

Now that the 'Brexit' vote is in the books and 'Leave' the EU side is the victor, what might this mean for U.S. real estate?

Some facts we know...

  1. Global Stock Markets Are Swooning!

  2. The British Pound Is Getting Hammered Versus Other Global Currencies!

  3. Interest Rates Are Falling Precipitously!

The List Of 7 Potential Impacts From 'Brexit' On Real Estate Are Below But First, The Impact Of A Declining Currency!

Going back in time to studying for the Series 3 exam (commodity futures), a weaker British Pound means that as of 7AM EST this morning Brits looking to buy products from outside of their country priced in U.S. dollars are going to be paying 8-9% more than they would have had they purchased them yesterday (see chart above that is merely a snapshot in time).

Of course the converse is also true meaning that U.S. dollar denominated buyers looking to purchase a product priced in British Pounds will be paying that much less.

What impact might this have on the U.S. real estate market?

Currency Exchange Rates - An Example

Conceptually exchange rates can be confusing so this is an example comparing the U.S. dollar to the Indian rupee...

'...Consider an electronic component priced at $10 in the U.S. that will be exported to India. Assume the exchange rate is 50 rupees to the U.S. dollar. Ignoring shipping and other transaction costs such as import duties for the moment, the $10 item would cost the Indian importer 500 rupees. Now, if the dollar strengthens against the Indian rupee to a level of 55, assuming that the U.S. exporter leaves the $10 price for the component unchanged, its price would increase to 550 rupees ($10 x 55) for the Indian importer. This may force the Indian importer to look for cheaper components from other locations. The 10% appreciation in the dollar versus the rupee has thus diminished the U.S. exporter's competitiveness in the Indian market.

At the same time, consider a garment exporter in India whose primary market is the U.S. A shirt that the exporter sells for $10 in the U.S. market would fetch her 500 rupees when the export proceeds are received (again ignoring shipping and other costs), assuming an exchange rate of 50 rupees to the dollar. But if the rupee weakens to 55 versus the dollar, to receive the same amount of rupees (500), the exporter can now sell the shirt for $9.09. The 10% depreciation in the rupee versus the dollar has therefore improved the Indian exporter's competitiveness in the U.S. market.

To summarize, a 10% appreciation of the dollar versus the rupee has rendered U.S. exports of electronic components uncompetitive, but has made imported Indian shirts cheaper for U.S. consumers. The flip side of the coin is that a 10% depreciation of the rupee has improved the competitiveness of Indian garment exports, but has made imports of electronic components more expensive for Indian buyers...' (Source)

What Are Some Potential Impacts Of 'Brexit' On U.S. Real Estate?

These are some initial thoughts...

  1. Potential Positive Of Safe Haven Buying - Citizens from EU countries who are looking to get their money out of Euros and to a safe haven, may look to purchase real estate in what is considered to be one of the more stable countries, the U.S., and currencies, the U.S. dollar,

  2. Potential Negative Of A Declining Wealth Effect - The impact of crashing stock markets around the world may directly hit the pocketbooks of potential investors who may have been buyers of U.S. real estate and may now not be able to to,

  3. Potential Positive Of Declining Interest Rates - If mortgage rates drop even further could that move potential buyers off of the fence or will this be a non-factor given the reasons why it is happening (10-year treasury at 1.54% down 24 bp),

  4. Negative Impact Of A Potential Global Recession - This factor speaks for itself,

  5. Negative Impact If 'Brexit' Impacts Financial Institution Liquidity And By Extension Their Ability To Lend To The Real Estate Market (See - ''Brexit', Derivatives And Unemployed Drinkers!'),

  6. Negative Impact If Highly Leveraged Companies Begin To Quick-Sale Real Estate Assets For Liquidity Purposes,

  7. Negative Impact If Other EU Countries Jump On The 'Exit' Bandwagon - The turmoil is incalculable at this point as not only stocks but bonds of some EU members, particularly the PIIGS, would crash when the support of the ECB goes away.

More potential impact and actual anecdotal evidence will be coming in future articles as 'Brexit' is an extremely fluid situation and the ramifications will begin to be known down the road.

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