Real Estate

If The Debt Ceiling Isn’t Raised, Higher Mortgage Rates Will Hurt Home Sales

A default on the nation’s debt, if Congress is unable to raise the federal debt ceiling in coming weeks, would boost mortgage rates by at least two percentage points and cause a slump in home sales as costlier financing puts real estate beyond the reach of more Americans, according to Jeff Tucker, a Zillow senior economist.

While it’s still unlikely the federal government will fail to pay its bills, the chances have increased in recent weeks because of an ongoing stalemate in Congress, Moody’s Analytics said last week. The chance of a debt default now stands at 10%, up from a previous estimate of 5%, the research firm said.

“Any major disruption to the economy and debt markets will have major repercussions for the housing market, chilling sales and raising borrowing costs, just when the market was beginning to stabilize and recover from the major cooldown of late 2022,” said Zillow’s Tucker.

The average U.S. rate for a 30-year fixed home loan likely would rise to 8.4% in coming months, he said, from last week’s 6.35%, as measured by Freddie Mac. That increase in borrowing costs would cause home sales to slump by 23%, while the U.S. unemployment rate likely would balloon to 8.3% from last month’s 3.4% as the economy entered a recession, Tucker said.

It would be a “self-inflicted disaster,” Tucker said.

Jaret Seiberg, the housing policy analyst for Cowen Washington Research Group, views Tucker’s estimates as possibly too conservative.

“Our view is that the Zillow report may be a best-case scenario as our concern is that credit markets will freeze up if there is a default,” Seiberg said.

Comments made by former President Donald Trump during a CNN “Town Hall” last week increased the chances of a debt disaster, Seiberg said. Trump told CNN’s Kaitlan Collins a debt default “could be nothing” and might be just “a bad week or a bad day.”

That stands in stark contrast to remarks he made while he was in the White House. On July 19, 2019, Trump described the nation’s obligation to pay its bills as “a very, very sacred thing in our country” and added, “I can’t imagine anybody ever even thinking of using the debt ceiling as a negotiating wedge.”

With a razor-thin Republican majority in the House of Representatives, even a few hold-outs inspired by Trump’s remarks could doom a chance to come to an agreement about raising the debt cap, Seiberg said. Negotiations over the debt ceiling aren’t about how much to spend – they’re about paying bills already incurred.

“We continue to view a default as unlikely, but that is premised on our belief that politicians realize how dangerous a default would be for the economy,” Seiberg said. “The problem is that unlike in prior fights, not every political leader agrees, as we heard this week from former President Donald Trump. It is why we cannot rule out a default.”

While economists agree that a failure of the U.S. government to pay its bills would be a recession-inducing catastrophe, they don’t agree on the “X date,” meaning the day a default would begin. Treasury Secretary Janet Yellen puts the month as June, and the earliest potential day as June 1. The U.S. Treasury said in January it would use “extraordinary measures” to move money around to delay a default as long as possible.

Goldman Sachs economists estimate the U.S. “will likely exhaust its cash and borrowing capacity by late July.” Zillow puts the default date as “almost certainly by August, depending on the flow of income tax receipts this spring.”

“It is impossible to predict with certainty the exact date when Treasury will be unable to pay all of the government’s bills,” Yellen told the Independent Community Bankers of America on Tuesday. “Every single day that Congress does not act, we are experiencing increased economic costs that could slow down the U.S. economy.”

The mortgage market is already showing signs of investor fear. Last month, the spread between 30-year fixed mortgage rates and 10-year Treasury yields reached the widest in almost 40 years. When spreads are wide, the mortgage rates that track the 10-year Treasury yield are higher than they normally would be as investors demand a risk premium.

In May’s first week, the spread was 2.95 percentage points, close to the 3.07 in mid-March that marked the widest margin since 1987, and beating the 2.96 in late December 2008 that was the biggest spread of the Great Recession, comparing Freddie Mac’s weekly rate average with 10-year Treasury data from the Federal Reserve.

“We are already seeing the impacts of brinksmanship,” Yellen said. “The U.S. economy hangs in the balance.”

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