As a business professor at UC Berkeley once said in his lecture, “You could circle the globe with all of the economists on earth and ask them to point in the direction of the economy, yet you’ll find that they are all pointing in the wrong direction.” Much the same seems to be happening with world economic interpretation of “Brexit”.
After two days of wild volatility in the equity markets, US equities are up a bit as I write this, but who knows how we’ll finish the day. And, of course, tomorrow could bring new concerns, or simply a different interpretation of the Brexit that renews the volatility. Suffice it to say, unless you are a hedge fund manager, no one likes wild swings in the market. It makes investors nervous, and when they are nervous, consumer confidence often slips.
Implications to Lafayette Real Estate and the Bay Area
- Volatility in financial markets has historically caused real estate markets to slow. Real estate tends to be a lagging economic indicator, so it may take a couple of months for this to unfold. The volatility of our first quarter 2016 is a very good recent indicator of what we might expect. We witnessed a slow down in Lafayette real estate, and more broadly, Bay Area real estate in the second quarter of this year. The upper price ranges were the most prominently affected.
- Interest rates will stay the same or may even drop due to the additional stress applied to our economy from Brexit. Some economists have already suggested that our fragile economic recovery post-recession may need another dose of QE (quantitative easing) later this year — a drop in the Fed rate. This will keep mortgage rates low.
- The US Dollar will strengthen as global investors seek a safe haven. This will increase the price of US goods, services and real estate for foreign buyers/investors. As a result, Chinese investment in US “trophy real estate” may slow. This could affect the price of luxury homes that have been propped up by this investment in key geographies such as San Francisco, the Silicon Valley, Los Angeles and Manhattan. Additionally, a decrease in US exports of goods and services due to the stronger dollar will negatively affect earnings of most US companies that sell into the global market.
- The possible counter point to the one above is that volatility in stock and commodities markets could cause investors to buy more real estate, even at stronger dollar prices. This happened as we emerged from the recession in the 2010-11 time frame. History might repeat itself, depending upon how volatile and disruptive Brexit becomes on the world economic landscape and what action investors take to chase returns.
- Brexit may be the beginning of a broader movement of disenchantment with the status quo, and other countries may follow Britain out the door. This could lead to much more widespread volatility in the EU and more broadly within the global economy.
- Fasten your seat belts, the safe money is on further volatility ahead.
The Bay Area is an Island…
The good news is that the US economy is fundamentally sound, and no well-respected economist seems to be pointing in the direction of bank failures or the type of trauma and volatility that we saw during the Great Recession. Lafayette real estate is most closely tied to the San Francisco tech economy, and has provided us with a buffer to the ups and downs of the broader US economy. To some extent, we’ve been an island. In the end analysis, Brexit may likely be just another “bump in the road”, but unfortunately, our windshields were too fogged to see it coming.