How the debt ceiling crisis could rile the residential market
Default could be haymaker for already precarious rates, prices
Lawmakers are deep in negotiations — without much promise — as the U.S. nears the June 1 deadline to avoid an unprecedented defalt on its national debt, which players in residential real estate are predicting could spell turbulence for the housing market.
A default on the national debt would rock the yield on 10-year Treasury bonds, which are closely correlated to mortgage rates. And as is sometimes the case in markets, even the threat of disaster can spell, well… disaster.
“If we really get right up into the eleventh hour, and it’s looking like a real possibility, then those jitters could enter long-term debt markets,” Zillow’s Jeff Tucker told Barron’s, referring to mortgage rates and the 10-year Treasury yield.
If the deadline passes without an agreement, that could be a haymaker for a housing market already struggling with high rates and high home prices, with Zillow estimating it could lead to a 23 percent drop in home sales.
A default could send mortgage rates up to 8.4 percent, according to a Zillow forecast reported earlier this month. That would be the highest rates seen in over two decades, and would make financing homes a lot more expensive: The projection sees the cost of financing a $400,000 home would jump by $450 per month.
National Association of Realtors chief economist Lawrence Yun struck a more reassuring tone.
Since mortgage rates are based on long-term debt, that could mean minimal impact from a short default, he said in a Thursday conference call.
“People know that America has the capacity to pay on interest,” Yun said. While short term Treasuries could “get bounced around” in the event of a default, the 10-year would remain somewhat steady.
“I don’t think the interest rate will be moving all that much if it is only one or two weeks of default,” Yun said. “But if it prolongs, obviously, it’s going to cause bigger harm.”
— Hiten Samtani