Another debate—or squabble—over the U.S. debt ceiling has broken out between lawmakers, raising a distant specter of potential federal default that has sparked some questions among real estate pundits.
Though many are hopeful that a government default on its mountains of debt is extremely unlikely, that hasn’t stopped economists from speculating on the calamity that could ensue in the housing market if a deal isn’t reached before the deadline. Overall, that outcome would send ripples into a housing market that is already weathering the headwinds of a rebalancing cycle and economic uncertainty of continued inflationary factors.
“While a debt default would be unprecedented, there would be serious implications for the housing market—and the overall economy—if Congress does not raise the debt ceiling,” says Dr. Lisa Sturtevant, chief economist for Bright MLS.
That sentiment was expressed by Zillow economist Jeff Tucker in a recently released report. Though he acknowledged that default is “very unlikely,” the company provided a speculative “worst-case scenario” perspective of a prolonged default.
According to Zillow, mortgage rates could hit 8.4% by September, causing the typical mortgage payment to surge by 22%. Considering the mortgage rate surge’s toll on the housing market last year, another rate swell would add to an already significant list of affordability issues for would-be buyers.
“Homebuyers 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,” wrote Tucker. “Home values might not see a notable drop, but higher mortgage rates would severely impair affordability, for first-time buyers especially.”
The ripples could also discourage many homeowners who locked in mortgage rates that were near 3%, further straining the dearth of existing single-family homes for sale.
“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,” Zillow stated in a May 11 press release. “If there were to be a debt default, the biggest projected deficit would come in September, with an estimated 23% fewer existing home sales.”
U.S. Treasury Secretary Janet Yellen asked Congress to raise the debt limit by June 1 to eliminate the risk that the U.S. couldn’t pay all its bills.
A failure by the U.S. to pay its bills on time could cause chaos in financial markets, lead to higher interest rates, and raise borrowing costs on U.S. debt.
A U.S. debt default would result in a “severe disruption for the economy,” which has already dealt with the impacts of elevated inflation and the Federal Reserve’s interest rate hiking response.
Realtor.com® Chief Economist Danielle Hale notes that another spike in interest rates brought on by default could deal a significant blow to the nation’s economic recovery, which has been on fragile footing since the Fed has tried to reel in inflation.
“We have seen first-hand over the past few quarters how interest rate sensitive homebuying is with home prices still close to long-term highs and many household budgets stretched thin in an inflationary economy,” she says. “When mortgage rates topped 7% in November 2022, home sales dipped to a 4 million unit pace in December 2022 and January 2023. These were sales lows not seen since the earliest days of the pandemic and, before that, the 2008 – 2010 aftermath of the Great Recession.
“With the economic recovery on fragile footing as the Fed raises rates to rein in inflation, the spike in interest rates that would follow a U.S. default could cause significant damage, undermining the progress made so far,” Hale continues. “We would see home sales slow as mortgage rates surged, and this might accelerate the weakening in home prices already underway in some cities.”
Even without an actual default, Hale says that the closer lawmakers allow the government to get to a likely default date without an increase in the debt limit, the more likely households are to feel an impact.
Matthew Gardner, chief economist at Windermere Real Estate, echoed similar sentiments. He tells RISMedia that several scenarios can play out depending on how long lawmakers take to figure things out.
As he describes it, Gardner says that the outcomes can be viewed as “the good, the bad and the ugly” when analyzing what’s at stake with this decision.
“The good thing is that in the first week, the Treasury is going to scramble, not much would happen,” he says, adding that the government could get a lifeline from an influx of cash flow from quarterly self-employed tax payments and corporate tax receipts coming in the middle of June.
“Even though it’s a bit of a lifeline, it’s quite likely that politicians are just going to get very scared, and they will end up figuring out two things,” Gardner continues. “One would be how to suspend the debt ceiling, which will give them a bit of a lifeline or raise it.”
Another scenario that Gardner lays out is if negotiations take longer and there is a default. Granted, this certainly isn’t the first time lawmakers have hit a stalemate in their debates over the debt ceiling, but the U.S. has never defaulted despite the back and forths.
However, Gardner suggests that hitting the deadline without a deal to suspend or raise the limit would have catastrophic consequences for the overall economy and the housing market.
“A relatively short breach would mean that we’ll see a decline in GDP,” he explains. “We’ll undoubtedly have a recession. We’ll lose about 1.5 million jobs, and the unemployment rate will go up to roughly 5%.
“But the worst one—the one we don’t want to talk about—is if it goes on longer,” Gardner adds. “If it goes on longer, meaning lawmakers don’t get an agreement until probably the end of July, then all manner of bad things happen.”
Sturtevant echoed similar sentiments, but she maintained—as each economist has—that a default of any kind is likely something that Congress will work to avoid before the deadline is reached.
“It is unlikely that Congress would allow the U.S. government to default on its obligations, but even getting close to default—we’re now just two weeks until we hit the debt ceiling—creates more uncertainty and erodes consumer confidence,” she says. “The uncertainty and unpredictability alone could lead home sales activity to cool further as we head into the summer.”