Brexit and its Effects on US economy and Real Estate

Following the recent vote by Great Britain to exit the European Union, there is a lot of speculation on how it will affect the US economy.  Some say it will be for the better and others say it will be for the worse.  One thing is for sure… it will be a little of both, and things are sure to change.  In this article, I’ll take a look at some of the early emerging concerns

What is Brexit?

I’ve never been a fan of name “mash-ups”, such as “Brangelina”, “Kimye”, or “TomKat”… but “Brexit” is a mash-up for Britian and Exit. This refers to Great Britain’s exit from a group of countries known as the European Union, which, at its most, included 28 different European countries, with its headquarters located in Brussels, Belgium.  The purpose of the EU was to promote greater economic, political, and social harmony between the neighboring countries, and to, eventually, adopt a singular currency for all members, the Euro… similar to how we operate here in the US: having a single currency, the ability to relocate between member countries without a Visa, and less hassle when it comes to foreign trade agreements.

Why Leave?

Great Britain’s decision to leave was based on a slew of factors, the main one being social and financial independence from the governing body in Belgium.  Initially, it seemed like a good idea for all member countries to work together, considering they historically went to war and fought against each other for centuries.  But where the financial benefits helped some countries, it hurt others.  Also, looser immigration standards meant that citizens were free to relocate to any other member country more freely.  Britain saw its foreign population explode following its entry into the EU in 1973, and with recent worldwide concerns regarding refugees and immigrants coming from areas all over the world, Britain felt it was time to tighten their own borders.

Early Effects

Initial impacts of the exit won’t be fully visible for months to years, but there is no doubt we, in the US, will feel some financial repercussions.  Terms of the exit require at least two years for Britain and the EU to work out the kinks, what rules will apply, and what’ll change, so not everything is expected to resolve overnight.  Since Great Britain is one of the wealthier (former) members of the EU, taking their wealth out of the collective economy is sure to hurt less wealthy countries.  Many economists expect the Euro to take a tumble, which will have ripple effects throughout most of Europe.  Also, for US citizens, one benefit is that it will be cheaper to spend US dollars in Great Britain.  Conversely, British travelers will find it more expensive to spend their currency in the US.  The exchange rate definitely isn’t starting out in their favor.

Controlled Border

There has been increasing concern in Great Britain for several years now over the loose immigration standards imposed by EU rules.  No matter what we Americans think about immigration here in our own country, Britain has its own set of worries, with this having been at the surface for many years.  So, for sure it’ll be harder to immigrate to GB.  Another problem will arise for citizens of neighboring countries who work in GB, and vice versa.  Current estimates say that approximately 1.2 million Brits live and work outside the UK in other member countries.  That’s definitely going to change.  It’s expected that Europeans will either have to apply for work visas in their country of residence, to legally immigrate to wherever they’re working, or possibly return to their home country and seek employment there.  Also, getting back and forth across a newly controlled British border is a worry for many Europeans.  Unlike here in the US, where you can drive freely from one state to another, that’ll be one of the first things to stop.

US Negotiations with European Countries

Having so many members of the EU, it was easy for the US to negotiate trade deals with the entire group of member countries.  Instead of having to negotiate deals with 28 different countries, we only had to negotiate with the central EU headquarters in Belgium.  Brexit will make it more time consuming, difficult, and costly to strike new trade agreements over time.  Instead of dealing with one “head”, now there will be at least two, and soon enough, probably more.  There is great concern that Brexit will trigger other member countries to also leave the EU, not necessarily because of their own desire to leave, but out of necessity to protect their own economy and individual wealth.

Financial Impacts in the US

First, many large European banks are headquartered in Britain, and specifically, London.  With Europe being Britain’s largest export market, and effectively, its biggest customer, London has established itself as a global financial center.  Trade agreements between countries are sure to change, and this could jeopardize Britain’s position as one of the wealthiest European countries.  If the any aspect of European economy suffers even slightly (which it’s sure to do), it will have financial impacts here in the US.  The US has lots of investments tied up in British banks, and if their economy dips, their stocks are sure to follow closely behind.

Declines in US Stocks

The US stock market, this past Friday, did not react well to Britain’s vote.  Depending on which index you’re looking at, stocks dropped between 3 to 4 percent.  On its face, that doesn’t seem like a lot, but when you consider the US economy grows at an average of 3 to 4 percent per year, this was equivalent to a whole year’s loss in one day.  This was not good news for older generations who have retirement funds tied up in the markets.  Younger generations may not have as much to worry about since there is plenty of time for economic recovery before they need to use their retirement funds.

No Doubt

There is no doubt that Brexit’s financial impacts will be felt for years to come.  On the NBC Nightly News this past Friday, I clearly heard a reporter say that Americans “should consider buying Real Estate instead of investing in stocks”.  Now, without a doubt, I’ve said for years that investing in Real Estate is always wiser and safer than investing in stocks.  Real estate is less volatile, and is less likely to suffer “overnight” like we so often see in the stock market.  According to an article published today on Newsmax.com, “American property is looking like a very safe investment right now.”

Consult your Trusted REALTOR

If you have questions about buying a home, or investing in US real estate, first start by consulting with a trusted and experienced REALTOR, and preferably one who has some understanding of financial markets and the economy.  Discuss interest rates with a trusted mortgage lender, as the ripple effects of Brexit are expected to have an impact on US interest rates.  If you are considering buying a home or investing in real estate, now may be a great time to come down off the fence.  Likewise, if you’re thinking of moving, strongly consider keeping your existing property and converting it to a rental/investment property instead of selling it.  And if that thought is on your mind, also consult with your local trusted Property Management Company to learn the risks, expenses, and potential profits you can make by starting, or increasing, your real estate investment portfolio.  For more information on any of these issues, contact us at Management 1 Tri-Cities Realty & Property Management today. We understand the complexity of all these issues and will work hard to provide you with sound advice and point you in the right direction.