The long-foretold housing market crash is growing some very real thorns lately. Indeed, Moody’s Chief Economist Mark Zandi told Congress earlier this month that the country may only have until early June to raise the debt ceiling before the Treasury runs out of money, resulting in the nation’s first-ever debt default. What does a U.S. debt default mean for the housing market?
Well, as you may surmise, nothing good. Should the U.S. default on its debts (and maybe even if it doesn’t), credit rating agencies are very likely to downgrade the quality of the country’s credit. This would immediately spike interest rates across the board for everything from bond returns to mortgage rates.
Unfortunately, despite some loftier estimates, Zandi and Moody’s Analytics estimate that time is quickly running short:
“Since Moody’s Analytics began estimating the X-date beginning early this year, we thought it to be in mid-August. But April tax receipts are running 33% below last year’s pace, meaningfully weaker than anticipated […] And despite weaker-than-anticipated tax refunds, the X-date may come as soon as early June.”
While the housing market wasn’t the necessarily the topic of Zandi’s Capitol Hill visit, it would be one of the most-impacted industries in the case of a U.S. debt default.
“It would be a lethal combination,” said Zandi, “You can see how this thing could really metastasize and take down the entire financial system, which would ultimately take out the economy.”
Housing Market Crash Fears Swirl as Congress Scrambles to Raise Debt Ceiling
Housing remains perhaps the single-most rate-sensitive major industry. As such, it would likely experience an accelerated slowdown should the country fail to pay its bills. Some estimate 30-year fixed mortgage rates could reach as high as 9% in the case of a U.S. default, sending home buying costs up a staggering 22%.
This would kill demand for homes, raise the cost to purchase a home tremendously, lower home values while making them more expensive to finance and crush home sales an estimated 23% by September. Given housing’s already tenuous state, a default may well be a crushing blow to the industry.
Zillow Senior Economist Jeff Tucker noted earlier this month just how impactful a default would be:
“While we don’t expect a debt default to occur, if it did, it would have unprecedented effects on the financial system […] This would reduce lending and credit availability throughout the financial system. What that means for the housing market is that the cost of borrowing would rise dramatically and sales would be dropping.”
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
