If congress doesn’t act before June 1st, we could see mortgage interest rates blowing up to over 8%, which would likely strike a death knell to the real estate market for the foreseeable future.
Although it is unlikely to happen, if the US government defaults on its debt, which can happen if congress doesn’t raise the debt ceiling, the cost of owning a home could become astronomical. Congress needs to act before June 1st of this year, or the real estate market is going to be screwed for a long time.
I’m talking about potential mortgage interest increases of up to 22% higher than the current levels. If this were to happen, we could be seeing interest rates as high as 8.4% by this September. Again, this is unlikely to happen, as congress in the past has always managed to raise the debt ceiling in time. However, past success is no guarantee of a future outcome, so it is best to be prepared for the worst.
Why would this happen? Should the US default on its debt, confidence in Treasury bills being repaid would waver. Investors would likely require a greater return on their investment before buying them, as they would be considered a riskier investment. Since mortgage interest rates typically mirror the moves of Treasury rates, mortgage rates would also be expected to increase.
According to Zillow economists, in such an economic landscape, nearly one-quarter of all expected home sales would fail to transpire. The largest projected deficit in home sales would occur in September, with an estimated 23% fewer existing home sales.
If you are currently a homeowner, there is a bit of a making lemonade out of lemons situation going on. Many potential sellers who are sitting on historically low interest rates around 3% are not going to be jumping into the marketplace. Because of this, inventory will remain extremely low, helping to curtail a shift to a buyers’ market, and helping to keep real estate prices from falling.
But remember, this is a worst-case scenario, and is unlikely to happen, as I’ve said a few times already. Most economists believe that congress will come to some sort of an agreement in the final hours, and things will continue, business as usual. In this future without a debt default, some economists anticipate home values to continue to grow by an estimated 6.5% through the end of 2024.
Let’s not take any chances here. If you are concerned with what is going on in congress right now, then contact your representative. If you live in Ventura county, than your representative is probably Julia Brownley. If you are located in the San Fernando Valley, then your representative is Brad Sherman. If you are in the Santa Clarita area, then your representative is Mike Garcia. Call them up, email them, show up at their office if you can. Tell them to do their job, raise the debt ceiling, and stop playing politics with the lives of everyday Americans.