Mortgage Rates May Jump If Politicians Fail to Raise Debt Ceiling

October 10, 2013 1 Comment »
Mortgage Rates May Jump If Politicians Fail to Raise Debt Ceiling

While the government shutdown has essentially placed mortgage rates in a holding pattern, partially because key economic data isn’t being released (jobs report), the looming debt ceiling could be more devastating.

If the government doesn’t come up with a way to raise its debt limit by next week, it could begin missing scheduled payments by October 22nd.

Most don’t expect the government to default on its commitments, seeing that it has never failed to make good on them, but everyone is certainly playing a game of “what if.”

One of those people is Lawrence Yun, the chief economist of the National Association of Realtors.

He warned that should the government have to choose between paying bills, like social security benefits, as opposed to interest obligations on U.S. Treasury bonds, interest rates could surge.

After all, buyers of Treasuries never anticipate the government missing a payment, unlike the average homeowner who might skip a mortgage payment here or there, hence the premium.

But if investors lose confidence and avoid Treasuries, even temporarily as a result of the Congressional impasse, the value of Treasuries may dive and yields will need to rise to draw in more buyers.

That will push mortgage rates higher, which rely on Treasuries for direction.

For Joe Homeowner, this could mean a mortgage rate a quarter-of-a-percent or so higher, all because of the cat and mouse game being played by Congress.

The longer it goes on, the more risk there is for collateral damage to homeowners and the like.

Those looking to buy or refinance have already been impacted by politicians in Washington, seeing that their inability to reach a solution on the government shutdown closed the USDA lending program and forced delays at the FHA and elsewhere.

Up to 450,000 Lost Home Sales If Rates Rise 1%

While it perhaps all just political gesturing, under an extreme scenario where mortgage rates shoot up 1%, home sales would decline by between 350,000 and 450,000 units, per Yun.

Obviously this would hurt the nascent housing recovery, and prevent many from qualifying for a mortgage.

But whether it comes from a debt ceiling catastrophe or not (unlikely), mortgage rates are indeed expected to rise 1% next year.

Rates are currently close to 4.25% on the en vogue 30-year fixed, but most expect them to climb to around 5.25% next year, including the California Association of Realtors.

So for those who just qualify now thanks to the low rates on offer, time is perhaps running out to find a home to purchase, especially with prices rising as well.

And it’s unfortunate that during this key time politicians are adding so much doubt, especially after the Fed extended QE3 and pushed rates lower.

Hopefully they find a solution sooner rather than later to avoid undue harm to homeowners and the economy at large.

In the meantime, it could make sense to lock as opposed to float to avoid any potential rate spikes in the near future, especially with rates still somewhat close to record lows.

One Comment

  1. Michael October 10, 2013 at 4:24 pm -

    why wouldn’t rates rise if the FED increases the debt ceiling as well? they really have NO choice but to raise it anyway. if they don’t, we are screwed and no longer the super power country….When they raise it, they will probably get rid of any Ceiling period. then it is a slow death of maybe 1 or 2 yrs before dollar is just worthless…

    by the way, home prices will drop to even lower than they did on this last recession…2007-20011/2… hedge funds are now trying to dump their portfolios as they could not rent them out like they thought they could as well as use those rents as packaged securities and sell around the world to suckers…they are dumping, rates will rise, jobs have not gained any ground but have lost ground, Obama care will tax everyone, state taxes are rising, food is getting more expensive…Get the Point? Realtors are SALES PEOPLE and they all want ONE last hurrah before THE SHIT HITS THE FAN!

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