What’s up everyone 

Zillow is now predicting interest rates may go up as high as 8.4%, home sales will plummet, and the housing market may slip back into a Deep Freeze if the U.S. Defaults on the debt ceiling. 

This could happen as early as June 1!

This would mean housing payments would increase by 22% according to a worst case scenario analysis from Zillow.

“Home buyers and sellers finally have been adjusting to mortgage rates over 6% this spring, but a debt default could potentially raise borrowing costs even higher and send the market into a deep freeze,” said Zillow senior economist Jeff Tucker.  

So let’s see what Tucker is saying exactly and the chances of this happening. We’ll look at a couple of articles by Zillow, Fortune &  The Hill.

Let’s dive right in

The U.S. could run out of cash to avoid a default as soon as June 1 if the debt ceiling isn’t raised or suspended, according projections from Treasury Secretary Janet Yellen, the Congressional Budget Office, and the Bipartisan Policy Center.

Democrats want to raise the debt ceiling, without any strings attached, and Republicans are calling for spending cuts. 

If Congress fails to raise the limit in the coming weeks, Treasury Secretary Janet Yellen claims, economic “calamity” would ensue. 

So what does that look like in regards to the housing market?

In a report published last week, Zillow’s senior economist, Jeff Tucker, said that if the U.S. defaults on its debts, mortgage rates could reach 8.4% by September, which would raise mortgage payments for new borrowers up over 20%.

One consequence in Zillow’s view would be rising bond yields and interest rates, as a default would rattle the assumption of safety for US Treasury bills and related assets.

As a result, interest rates on mortgages would climb, with Zillow projecting a possible peak of 8.4% on 30-year-fixed rates in September. That’s up from about 6.125% now.

“Home values might not see a notable drop, but higher mortgage rates would severely impair affordability, for first-time buyers especially,” Tucker continued. “It is critically important to find a solution and not put more strain on Americans who are striving to achieve their homeownership dreams.” 

Mortgage rates have already doubled in a little more than a year as the Federal Reserve raised interest rates to combat inflation. At their highest point last fall, the 30-year fixed rate reached 7.08 percent before settling above 6 percent in the first half of 2023. 

This is in conjunction with home prices skyrocketing 41% during the pandemic housing boom therefore making the affordability crisis at an all time high. 

And If mortgage rates go up to over 8%,  well, Zillow says that would send the housing market back into a “deep freeze.”

Lambert gives an example in the Fortune article to show the difference in monthly mortgage payments between 6% and 8%. 

On a $600,000 home, after putting 20% down, the monthly payment at 6% would be roughly $2,878 (without taxes and insurance.) With the exact same circumstances but at 8%, the monthly payment would be $3,522. That’s a $644 monthly difference. That would price a lot of buyers out of the market, and keep those who have been sidelined since rates went up last year on the sidelines. 

Zillow also projects that the combined impact of both buyers and sellers pulling back from the market would result in 23% fewer existing home sales from 4.3 million in April to 3.3 million in September.

“When we forecast the evolution of the housing market over the next 18 months in the event of such a debt default, we estimate that existing home sales would fall as much as 23% relative to the no-default baseline forecast later this year, and that home values may be 5% lower at the end of 2024 than expected in the no-default scenario,” Zillow says. 

A default would also likely coincide with a sharp increase in unemployment, Tucker estimated, jumping from the current 3.4% to a peak of 8.3% in October before declining.

Now, the United States has never defaulted on its debt, and it remains an unlikely outcome of the current standoff about raising the debt ceiling. 

But, if it were to happen — which could be as soon as June 1 without intervention — it would further crush an already wounded housing market.

“While we don’t expect a debt default to occur, if it did, it would have unprecedented effects on the financial system,” said Tucker. “This would reduce lending and credit availability throughout the financial system. What that means for the housing market is that the cost of borrowing would rise dramatically and sales would be dropping.”

The severity of the impact depends a lot on the duration of the drama.

“If the crisis grinds on for longer, all these impacts would last longer and be more severe,” he said. “If it turns out to be a more short-term problem, there would be shocks but I could see the situation where it could come back relatively quickly.” Tucker said.

With about three weeks till the point at which the government can no longer pay its bills — known as the ‘X-date — the point is approaching when that risk will begin to be priced into lending, if the crisis is not resolved.

“Right now, it’s contained to short-term securities, like one month Treasuries, which have been breaking records,” said Tucker. “It is a looming risk about a month away, so it isn’t yet wreaking havoc on 30-year mortgage rates. But we’re continuing to inch forward into unprecedented territory.”

One interesting thing they noted was that even if the worst case scenario happened, the Zillow economists still feel home values won’t suffer too much.

The Zillow analysis projects that if the United States were to default on its debt, home values would begin to fall starting in August, but only by 1% from current levels through February 2024.

 Even in this dire scenario, home values would still be expected to rise 1% from today to the end of next year. That’s down from a current expectation of 6.5% home price growth over that period.

Home values tend to fall sharply when the market is flooded with listings. But in this scenario, inventory would shrink below its already historically low levels. Low inventory would keep prices from falling too far, too fast.

Now, if unemployment does rise to 8.3% that could force many homeowners to sell if they can’t afford to pay their mortgages which may then bring prices down if the inventory dramatically increases. 

The bottom line is a debt default would mean a major disruption for the housing market, reducing sales and  increasing mortgage rates to over 8%.

“The exact contours of a debt default scenario this summer are unclear, but also unimportant for the conclusion about its impact on the housing market,” he said. “Any major disruption to the economy and debt markets will have major repercussions for the housing market, chilling sales and raising borrowing costs, just when the market was beginning to stabilize and recover from the major cooldown of late 2022.”

What do you guys think? Are we heading for another major correction? Is the American dream of owning your own home over?

How in the world are people supposed to afford a house with higher prices and interest rates over 8%?

Let’s just hope the powers that be work out a solution with the debt ceiling that doesn’t adversely impact the housing market even more.

We should know very shortly.

Interestingly enough, if we look at what is happening in the housing market right now, Redfin reports that pending home sales have increased over the last week despite the limited inventory with nearly half of the homes that do sell doing so within 2 weeks. 

That being said, pending home sales are down 15.8% year over year. 

And new listings of homes for sale fell 19.3% year over year. 

So the market is more active right now in May of 2023 which is normal around this time of year but it is still down from previous years.

“This spring’s housing market is hot but cold, with scant listings making it less active than usual but fast and competitive at the same time.  The good news is that buyers are out there, trying to find a seat in a game of musical chairs.  The bad news is there aren’t enough chairs,” said Redfin Deputy Chief Economist Taylor Marr

Where I am in the DC area, good houses are selling fast and in multiple offers. I had 3 sales this week- all in different areas and different price points ranging from 450k to 1.8 million and they all sold in multiple offers and escalated higher than the asking price.

What’s happening where you are? How is the housing market? Comment below!

 If you didn’t see last week’s video on the Housing market, take a look now. We went through both Corelogic and Zillow’s revised housing market forecasts as well as Black Knights recent research that suggests we may be back in 2006 all over again.

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