‘Chaos’: How a U.S. Debt Default Would Eviscerate the Housing Market for Buyers and Sellers – Realtor.com News

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The game of chicken that lawmakers on both sides of the aisle appear to be playing with the nation’s fast-approaching debt ceiling could have devastating impacts on the housing market if an agreement isn’t reached—and soon.
The country could start running out of money needed to pay its debts as early as June 1, although there is no official doomsday date.
Most economists and financial experts agree that there is the slimmest of odds that the U.S. will default. It’s never happened before in the nation’s history—and the results would be too catastrophic.
“There’s too much riding on it,” says Realtor.com® Chief Economist Danielle Hale. “It would be very bad for the economy, and that would spill over into the housing market.”
The impact of a default cannot be overstated.
If rising mortgage interest rates hammered the housing market, a default would be akin to dropping a nuclear bomb on it. Mortgage interest rates would almost certainly shoot up, popular government-backed loans could disappear, and government assistance provided to low-income renters could disappear. The pain would be shared among homebuyers, sellers, landlords, and renters.
Broadly, a default would imperil the nation’s financial reputation globally as the U.S. fails to pay its debts. The stock market would likely tank. Government workers, contractors, Social Security recipients, and countless others could stop receiving the checks they rely on. It could trigger a recession, and unemployment would undoubtedly rise. And those are just a few examples of many worst-case scenarios.
“If they did default, it would trigger chaos throughout the world market, and it would be worse than the 2007–08 crisis,” says Robert Prati, a finance professor at East Carolina University in Greenville, NC.
If the federal government defaults, it’s unclear who gets paid and who doesn’t. About a half-million jobs could be lost, according to the White House. If the standoff between Democrats and Republicans isn’t resolved quickly, about 8.3 million could be out of work as a result.
The longer the impasse drags on, the more damage is inflicted on the economy—and the real estate market. Home prices could fall, sales would likely dry up, and the housing shortage could worsen.
“I’m confident that we’ll get the agreement on the budget, that America will not default,” President Joe Biden said in a speech on Wednesday. “And it would be catastrophic for the … American economy and the American people if we didn’t pay our bills.”
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The housing market fallout could be disastrous.
Interest rates would jump and mortgage rates would likely follow, potentially getting up to 8%, says Lawrence J. White, an economics professor at New York University.
From there, it’s a domino effect. Higher mortgage rates would price out many would-be buyers. That lack of competition could lead home prices to come down even more. Potential sellers who locked in lower rates when they purchased their homes or refinanced their mortgages might be even more unwilling to list their homes. And the number of homes for sale could fall even further, worsening the housing shortage.
Even if the impasse is short-lived, mortgage rates could remain elevated for longer than is comfortable for buyers and sellers.
“We’re in uncharted territory,” says White.
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Buyers in need of mortgages wouldn’t just be struggling financially. Government-backed mortgages, such as Federal Housing Administration and U.S. Department of Veterans Affairs loans, could suddenly become unavailable, warns Prati.
Without these low and no downpayment loans, first-time homebuyers could have an even harder time getting into the market.
Meanwhile, the housing vouchers and assistance provided to low-income renters could dissipate, at least temporarily. Tenants could potentially be evicted if their landlords don’t get paid.
And while homeowners who rely on the federal government for their incomes or Social Security payments could be late on their mortgage payments, they’re unlikely to lose their homes to foreclosure. It typically takes months for a foreclosure to go through, and a hypothetical political standoff isn’t expected to last.
But those who can’t afford to pay their bills could see “lasting damage” to their credit scores, according to Hale.
“It would be really ugly for the housing market,” she says.
As talks between the White House and Republicans broke down on Friday, the stock market dipped.
“Sometimes the game of chicken goes wrong, and you go over the cliff,” says White. “That always worries me.”
Clare Trapasso is the executive news editor of Realtor.com where she writes and edits news and data stories. She previously wrote for a Financial Times publication, the New York Daily News, and the Associated Press. She also taught journalism courses at several New York City colleges. Email clare.trapasso@realtor.com or follow @claretrap on Twitter.
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