As the federal government careens toward a possible default on its debt, millions of Americans wonder what the impact would be to their own lives.
Homeowners and buyers and sellers all would feel the effects of Uncle Sam’s failure to pay the nation’s financial obligations, according to a recent Zillow analysis of the situation.
As Zillow notes, unless Congress raises the statutory debt ceiling — the cap on the amount of money the federal government can borrow — then a default could occur as early as June or as late as August. So, if leaders in the federal government cannot reach a compromise in time, what would be the impact on housing?
Following are some of Zillow’s conclusions.
The good news
For starters, Zillow does not expect the U.S. to default on its debt. In fact, it deems the prospect of this happening to be “very unlikely.”
This is not the first time political leaders have reached an impasse over raising the debt ceiling. But despite that history, the U.S. never has defaulted on its sovereign debt. Eventually, the warring sides always have reached an agreement.
However, that history does not guarantee that a default won’t occur this time. So, the Zillow analysis merely tries to forecast what might happen given a worst-case default scenario.
If the U.S. does default on its debt, mortgage rates likely would shoot higher, Zillow says.
Rates for 30-year mortgages could jump to 8.4% in the wake of a default. As a result, mortgage payments for a typical home could soar 22% higher by September.
Such a rise would be less than the surge in mortgage rates that occurred throughout 2022. But it certainly would not be good news for buyers.
In a summary of the analysis and its findings, Jeff Tucker, Zillow senior economist, says the impact of a large rise in mortgage rates would be substantial:
“Home buyers and sellers finally have been adjusting to mortgage rates over 6% this spring, but a debt default could potentially raise borrowing costs even higher and send the market into a deep freeze.”
He says finding a solution is critically important to avoid putting more strain on shoppers who already feel priced out of many markets.
Much higher interest rates “would freeze sales in an already chilled market,” Zillow says.
Higher rates make homes less affordable for buyers. Also, many homeowners who might have considered selling when mortgage rates were lower could change their minds.
Many of today’s homeowners have mortgage rates of around 3%. If those owners sell, most presumably would have to buy a new home in a situation where mortgage rates would be two to three times higher than their present rate.
The end result would likely be far fewer home sales than would be likely without a debt default. According to Zillow:
“Zillow projects this combined impact of buyers and sellers pulling back would wipe nearly one-quarter of expected sales off the board in some months. If there were to be a debt default, the biggest projected deficit would come in September, with an estimated 23% fewer existing home sales.”
A debt default might cause a slight deflation in home values that have ballooned in recent years. But the impact on values likely would be modest.
Zillow notes that after a brief cooldown last year, home values are again increasing near historical norms. In the wake of a default, home values nationwide might decline around 1% between August and February of next year, Zillow says.
And even if that worst-case scenario comes to pass, values still would likely be up 1% from today through the end of 2024. Without a default, Zillow projects home values will rise a healthy 6.5% in that time.
Simple supply and demand would help keep housing prices from sinking after a default, Zillow says:
“Home values tend to fall sharply when there is a glut of listings flooding the market, but very low inventory in this scenario would act as a parachute, keeping prices from falling too far, too fast.”
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