US default would send mortgage rates past 8%

The United States may be weeks away from defaulting on its debt, which could have a devastating effect on the housing market.

Mortgage rates could rise to 8.4 percent and payments on the typical home could rise by 22 percent if the nation defaults on its debts, according to an estimate by Zillow reported by Bloomberg. 

Though a default is “unlikely,” Zillow senior economist Jeff Tucker said, it could “send the market into a deep freeze.”

It would be a blow to buyers and sellers alike after mortgage rates doubled over the course of last year and settle below 7 percent in recent months. Interest rate hikes spiked mortgage rates and, coupled with record home prices, sent an affordability index by the National Association of Realtors to a 33-year low late last year.  

Home prices are largely safe from declines because of tight inventory, but surging mortgage rates could all but stop buying and selling.

If mortgage rates surge to 8 percent, Zillow forecasts existing home sales would drop 23 percent from 4.3 million in April to 3.3 million in September.

A major economic disruption could upend activity and borrowing costs “just when the market was beginning to stabilize and recover from the major cooldown of late 2022,” Zillow said. 

A debt default, however, ties more closely to rates and would also cast a dark shadow over the broader economy.

The dire scenario could be avoided if politicians come to an agreement to raise the debt ceiling before the end of the month. President Joe Biden and Speaker of the House Kevin McCarthy both have the June 1 date on their minds, but no agreement has been reached.

A meeting between key figures was scheduled for today, but has since been postponed to next week, Reuters reported.

A debt default at the beginning of June is a projection, not a guarantee. That’s likely the soonest it could happen, though, according to Treasury Secretary Janet Yellen.

— Holden Walter-Warner