U.S. Default Seen Pushing Housing to the Brink

Housing largely dodged a bullet on the government shut down that went into effect October 1. The pending default, however, is an entirely different matter. As the October 17 default deadline nears, knuckles in the housing industry are turning white.

All the progress that the housing recovery has achieved since the crashed could be erased overnight if the U.S. defaults on its debts, according to the president of the National Association of REALTORS®. But Gary Thomas is not the only housing leader raising alarms and the debt default clock ticks down.

In testimony before the Senate Committee on Banking, Housing and Urban Affairs, NAR president Gary Thomas said that unless the debt ceiling is raised in “a timely manner,” the country would face a recession that would wipe out the recent progress made in home prices, home sales and new residential construction.

Robert Dietz, Vice President for Tax and Market Analysis for the National Association of Homebuilders, says the primary effect of a default or downgrade would be increased uncertainty. “Home buyers are making purchase of a capital asset that they will own, on average, for ten years. Given other sources of uncertainty, particularly from the labor market, the largest impact from a failure to reach a deal that increases the debt ceiling would be to further increase concern and anxiety of families attempting to make long-term economic decisions.

“What the housing market needs now is more, not less, certainty, with respect to housing policy and access to capital via the mortgage markets. This will help stabilize housing prices, thereby helping households repair balance sheets and set the stage for more robust economic growth.”

Writing in Friday’s New York Times, economist Paul Krugman argues that a default would create a shock to the economy on a scale of the Great Recession or the Housing Crash of 2007. The default would put the burden of paying interest on Treasury bonds. Currently the cash-flow deficit is a bit more than 4 percent of GDP, which would have to be closed immediately and the government would then fall even further behind on its bills, he says.

“So, when did we last see a spending shock this big? As it happens, we’re looking at something just about the size of the post-bubble housing bust, which was also about 4 percent of GDP:

NAR’s Lawrence Yun describes a similar scenario. “Should the government decide to pay bills other than interest obligations, we can expect interest rates on Treasury bonds to rise as investors look for more return to compensate for the increased risk of their not getting paid. And if that happens, mortgage rates will rise, because mortgage rates follow Treasury rates.”

Yun says home sales can be expected to drop by 350,000 to 450,000 units for each 100 basis-point rise in mortgage rates.

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About thenoelteam

As a Broker with RE/MAX Alliance, I work energetically for my clients whether they are a buyer or seller. I help you achieve your goal of owning a home or getting the best price for your home in the shortest time possible. After graduating from UCLA with a degree in communications and finance, I was licensed in 1977 and since then I have sold over 3600 properties amounting to over $1 billion in sales. I currently rank in the top 10 in home sales for Colorado. I offer the same quality of service and superior communication to all clients, ranging from starter homes to multi-million dollar estates, commercial and income properties, relocations and foreclosures My goal is to provide you with the best representation possible whether you are buying or selling. Over the years, one of the things that I've discovered is that there is a difference in the way individual Realtors do business. For me, I have always felt that honesty and personal integrity are the foundations upon which a successful business and career are built and sustained. I have an extensive background and knowledge base in real estate, including financing, which has enabled me to provide outstanding, quality advice and service not found with many agents today. My commitment to communication creates a positive relationship between my client and myself that results in a successful property sale or purchase. My passion for real estate, commitment to my clients and personal integrity has helped me to achieve success placing me in the top 1% of all brokers in nationwide. In my career, I have earned a number of awards and received considerable recognition for my success but the most significant recognition comes from the fact that over 75% of my business comes from past clients. My success is a true measure of my client satisfaction.
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