Truly an interesting week. Took a break from the Texas drought and spent a very wet week in Connecticut. Since I was here six months ago, at least where I was visiting, there seems to be a lot more “for sale” signs and a much tighter single family rental market. Potential buyers are nervous and uncertain about purchasing, and renting has become a more “respectable” option.
Nerves are also playing havoc with new home sales. The Commerce Department is reporting that [Despite the headline MOM numbers being up.] sales are down 23% YOY. If things aren’t bad enough, there are those that worry that if the debt ceiling isn’t raised, home sales will be threatened even further. How’s this for a dire scenario? (via Chris Wheller of the Center for American Progress)
The connection between the debt ceiling, the housing market, the construction industry, and the broader economy is the rate of interest paid on U.S. Treasury bonds and home mortgage rates. Failing to raise the federal debt ceiling, which is the maximum amount that the federal government can borrow without additional congressional action, would cause interest rates to climb, perhaps sharply, and they would remain higher than they otherwise would. Mortgage rates, among other interest rates, would rise alongside interest rates on U.S. Treasury bonds, making homes less affordable and depressing house sales and prices. The housing market double-dip decline that many fear would quickly become a reality, destroying even more of families’ home equity, slowing the economic recovery, and cutting much-needed jobs.
I’m not quite certain why Wheller thinks that housing hasn’t been experiencing a double dip already. Most analysts agree that after the expiration of the tax credit, housing continued its downward slide. But he explains in his article his worries about the potential affects of rising interest rates and draws this conclusion:
A double dip in the housing market—fewer sales and lower prices—would send construction employment lower again and prolong the economic pain for laborers and specialty contractors alike. Conclusion Republicans are gambling with the housing sector’s health just as it’s starting to stabilize. Not raising the debt ceiling would have serious economic consequences if it became a reality. The housing market would be one of the first sectors feeling the pain from this policy decision. House sales and prices would tumble, quickly raising foreclosures, lowering growth, and destroying jobs.
Whatever arguments there might be for raising the debt ceiling, prevention of a “double dip” is not valid. Certainly, rising interest rates means a negative impact on home sales and equity, which does tend to increase foreclosures. It is, however, a question of degrees. Raising the debt ceiling won’t insure the stability of housing. The housing supply is such that there is virtually no demand for growth now, and construction is already at record lows.
Supply and demand is the major driver of the housing market and home prices. Whether it be a tax credit, foreclosure prevention or low interest rates, no program is going to outweigh those forces.
The housing market won’t be destroyed if the debt ceiling is not raised. It will continue to limp along– policy changes will only affect the degree to which it limps.
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Note: My heartfelt thanks to John and Igor for minding the shop while I took the week off. The break was much appreciated. : )
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“Failing to raise the federal debt ceiling……. would cause interest rates to climb.”
I don’t get this. Blocking federal borrowing ought to lower interest rates. as more funds become available for other borrowers. Alternatively, the required reduced spending could slow the economy and lower rates. Can somebody explain?
Ron-
Right now low interest government loans make up about 90% of the mortgage market. They can keep the interest rates below market by not pricing in risk– they stick taxpayers with that. Private sector loans are more expensive and have higher downpayment requirements. Private industry charges a premium for risky loans.
With housing prices declining, RE isn’t the safe bet it used to be. If the government can no longer buy MBS, it will have to give up market share and interest rates go up.
I don’t really expect this to be a bad thing for buyers. They will have to buy less expensive homes if they have to pay more interest, but it shouldn’t really hurt as long as the payment is the same. For sellers however, higher interest rates are a killer. They’ll have to lower prices to attract the same buyers.
Excellent reply to Ron’s question, Twist. I agree with you that failing to raise the debt ceiling will not doom the housing market. Buyers and sellers will adjust house prices in response to any interest rate hikes.
As for debt ceiling, it’s true that not raising it will not have an immediate effect on the housing market – but hitting the debt ceiling will kill investor confidence in US bonds and send stock markets at home and abroad into a tailspin. The end results won’t be pretty.