Failing to Pay America's Bills: Another Hit for Housing?

With less than a week until possible default, Republicans are putting an already weak housing market at risk by refusing to work with Democrats on an agreement to pay our nation’s bills and reduce the deficit. An article in today’s National Journal explains how failing to pay America’s bills would cause interest rates to soar, which would weaken the housing market and have a real impact on American families:

National Journal

Another Hit for Housing?

The debt-ceiling impasse could make the biggest economic weight even heavier.

by Jim Tankersley

It’s tough to remember now, given the onslaught of brutal economic and political news that has followed, but last month actually brought a sliver of good news about the beleaguered housing market: The National Association of Realtors reported that its measure of pending home sales rose by 8.2 percent in May.

Analysts don’t expect repeat cheer when the index for June drops on Thursday morning—the Bloomberg consensus forecast is a 2 percent drop. And potentially far worse news looms on the horizon. If Congress and President Obama can’t find agreement on raising the nation’s borrowing limit, the housing sector could suffer another big hit.

Housing remains the economy’s most troublesome problem child. Unlike consumer spending and hiring, which each surged briefly during this slow-and-go recovery, housing has stayed in near free-fall (except for the period when federal tax credits were propping it up artificially) throughout the country since the financial crisis.

Home prices continued to fall, year over year, in the Case-Shiller numbers released this week. Home sales and home-building levels remain extremely depressed, and with them, employment in real estate and construction. A glut of foreclosures continues to clog the market.

Those problems figure to compound under almost any scenario in which lawmakers fail to raise the debt ceiling in time. If the government defaults on its debt, or if rating agencies downgrade its credit score, interest rates figure to soar—and likely, mortgage rates with them.

Equally troublesome is the possibility of the federal government prioritizing its bills, having run out of borrowing authority, and skipping payments to contractors, government workers, or beneficiaries of social programs such as Medicare or Social Security—leaving a lot of Americans with a lot less money to buy a house or make a mortgage payment.

Analysts' estimates of how much that would hurt the market range from “a bit” to “a ton.”
“If Congress fails to raise that ceiling then the U.S. housing market would most likely experience a severe double-dip contraction marked by much lower home sales and depressed house prices,” Christian E. Weller, a senior fellow at the liberal Center for American Progress, wrote in a white paper earlier this year. “That, in turn, would spark a return of the economic pain of the past few years for many families as foreclosures would remain at or near record highs, and jobs in key sectors, such as construction, would disappear again.”

Mark Calabria, a housing expert at the free-market Cato Institute, predicts a price decline from increased interest rates would “be minor, no more than 5 percent.” The length of the impasse beyond the drop-dead date of August 2 is key, he added.

“Anyone with any sense has already decided not to close on their mortgage on either August 2 or 3. Or to go mortgage shopping those dates. So if this lasts less than a week, then the impact will be relatively short lived.”