An agreement on the U.S. debt limit could be reached by this weekend. However, if negotiations between President Joe Biden and House Republicans fall apart, the housing market won’t be immune from the fallout.
A default would shake up the financial markets, including the yield on 10-year Treasury bonds, with which mortgage rates often move.
In the event of a default, mortgage rates could rise as high as 8.4%, according to a
Zillow
study published earlier this month. That would bring mortgage rates to a 23-year high and add about $450 to the monthly cost of financing a $400,000 home purchase from current levels.
In a housing market already hampered by both high prices and mortgage rates, a default and subsequent rise in rates would freeze the market, Zillow said. The home listings company said a default could drive home sales 23% lower than recent levels.
Even the fear of a default could impact mortgage rates, says Zillow senior economist Jeff Tucker. “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,” Tucker said, referencing mortgage rates and the 10-year Treasury yield.
Should a default occur, Zillow expects home prices to fall a relatively minor 1% from current levels. Such an estimate is due to the already-present scarcity of home listings, which comes as sellers opt to hold onto historically-low mortgage rates obtained earlier in the pandemic.
Mark Zandi, the chief economist at Moody’s Analytics, anticipates a significant decline in home prices if there’s an extended default. If it lasts longer than a few weeks, “we’ll be in a full-blown downturn, with millions of lost jobs [and] much higher unemployment,” he says.
He says the upheaval would ultimately send home prices 20% lower as mortgage delinquencies and defaults rise. “You get into this self-reinforcing vicious cycle down, which is what happened during the financial crisis,” Zandi says. “The same dynamic would take hold here.”
For homeowners worried about the potential impact of a breach, news that politicians would focus on reaching an agreement to avert such a downturn is a good sign. “This is one of those forecasts where I really never want to find out if this was right,” says Zillow’s Tucker.
Zandi says chances are better that politicians reach an agreement than for his worst case forecast to come to pass. The odds of a default are not zero, but close to it, he says. “The most likely scenario is there’s going to be a lot of drama,” Zandi says. “But once lawmakers sign on the dotted line and increase the limit, things will settle down quickly, and I think the damage to the economy and to the housing market will be on the margin.”
One economist who has a more optimistic forecast: Lawrence Yun, the National Association of Realtors’ chief economist. He said Thursday in a conference call that since mortgage rates are based on long-term debt, that could mean minimal impact from a short default.
“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 Treasury yield would remain near its recent range of about 3.6%, Yun said. “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.”
One unknown is how a default would impact borrowers approved for government-backed mortgages, Yun said, adding that in a default, it’s uncertain whether the process of obtaining that loan would continue.
Write to Shaina Mishkin at shaina.mishkin@dowjones.com
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