Pioneer Valley REALTORS®, home buyers and sellers should take note of impact debt ceiling impasse has on real estate market Reply

National Association of REALTORS® President Gary Thomas appeared before the United States Senate Committee on Banking, Housing, and Urban Development to warn members of Congress of the severe impact a default on the nation’s debt will have to the housing market and the economy.  The NAR president’s statement includes things that members of Congress should already know and what every Pioneer Valley home seller, home buyer, and real estate sales professional needs to know.

“It is no secret that real estate is the cornerstone of our nation’s economy,” Thomas said.  He pointed out that the housing sector accounts for roughly 8% of GDP and summarized improvements in the real estate market.  Thomas said that home prices have risen 15% in the last two years, home sales have improved by 13.2% nationally since last year, and that residential construction has recovered 500,000 of the 2.3 million jobs that were lost as a result of the financial crisis.  Home sales and prices have improved in the Pioneer Valley, as well.

Thomas explained to the senate committee that a government default will hurt the recovery of the real estate market. 

“Investor confidence along with consumer and business sentiment will likely fall sharply, placing both domestic and global financial markets in turmoil,” he said.

The NAR president pointed to the 2011 debt ceiling impasse and its consequences to illustrate the dangers of a mere impasse, never mind an actual default.  Thomas said that the mere threat of default hurt economic growth and led to a downgrade of the nation’s credit.  So propositions of a short term debt ceiling solution will only prolong the destructive affect on the economy.

“Even though lawmakers were able to raise the debt limit before the Treasury expended its remaining cash on hand, political gridlock nearly caused our economic recovery to freeze,” he said, adding the impasse of 2011 led to higher borrowing costs for the federal government, which will cost taxpayers $19 billion over 10 years. 

Because Treasury rates are tied to long-term mortgage rates, Thomas explained that the nation’s default on its debt would lead to higher mortgage rates.  Further, he said that a default would also lead to even tighter lending standards because of the increased capital banks must now hold, much of which is in U.S. Treasury securities that would decline in value.

“Banks would likely restrict new lending in order to shore up capital and charge more for mortgages they originate,” Thomas said.  “Borrowers would be impacted by both tighter credit standards and the compounding of higher interest rates.”

Thomas explained the impact of higher interest rates on home sales, as well.  He said that a 1% increase would result in a decline of between 350,000 to 450,000 units sold because of the increased cost of borrowing and 700,000 to 900,000 fewer jobs. 

“That relationship might prove more robust in an environment of rising mortgage rates and bank tightening,” he said.  

Thomas also pointed out that the situation was different in 2011 when mortgage rates remained low despite the debt ceiling gridlock, citing the sovereign debt of Europe and adjusted first quarter GDP, both which had an impact on financial markets that led to a drop in Treasury yields, which kept mortgage rates down.  “If mortgage spreads widened today as a result of a debt ceiling impasse, with Treasury yields rising, the negative consequence for borrowers would be higher mortgage rates, which would curtail household spending and prevent the housing market from contributing to our economic recovery.”

What’s more, Thomas advised the senate committee that a default would also hamper the Fed’s efforts to reinvigorate the economy through its purchase of $45 billion in treasury securities and $40 billion in mortgage-backed-securities, which they eventually want to wind down as the economy improves.

“A decline in Treasury prices could undermine the Federal Reserve’s ability to wind down its purchases in an orderly fashion, potentially creating volatile movements in mortgage rates,” Thomas explained, “In the long term, lower Treasury and mortgage-backed (MBS) security prices could hamper the Federal Reserve’s ability to manage its significant holdings of Treasuries and MBS.” 

Consumer confidence was another thing that needs to be taken into account, Thomas said.  When consumers are not confident about the economy, they spend less. He said that this was also observed in 2011 when Congress was gridlocked regarding raising the debt ceiling. 

“According to the U.S. Department of Treasury, consumer confidence eased in the spring of 2011 over employment concerns before it plummeted 22 percent in response to the impasse; it took several months after the debt limit stalemate was resolved before consumer sentiment recovered,” Thomas said, adding that low consumer confidence has a big impact on home sales.

Compounding the impact of the risk of default or an actual default are the new mortgage rules, which are stricter than they were in the past, Thomas said.

Thomas advised that the housing recovery is already facing challenges without the Congressional impasse regarding the debt ceiling.  He said that, although the Fed is continuing to keep mortgage rates down by continuing its bond and securities purchases, mortgage rates are still expected to go up.  The federal shutdown has also hurt consumer confidence, further hampering the recovery of the real estate market.

The NAR president closed by asking Congress not to get in the way of the economic recovery and echoed the concerns of many.  He asked Congress to learn from the mistakes of the past as was observed in 2011.  “Let’s not make this mistake again,” he said, adding that an actual default would result in catastrophic consequences for the economy. “This scenario may include higher interest rates, reduced consumer spending and business investment, diminished household wealth, and high unemployment levels that could last more than a generation.” (the full statement can be read here). 

If you are planning on buying a home in the Pioneer Valley, make your first call to Michael Seward at 413-531-7129. Michael Seward is a Certified Residential Specialist, a Certified Buyers Agent, a Certified Loss Mitigation Specialist, a Certified New Homes Specialist, and Green designee of the National Association of REALTORS®.

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