Another looming showdown over the debt ceiling—the amount the federal government can borrow without further congressional approval—could derail one of the few bright spots in our fragile economic recovery: the housing market.
If conservatives in Congress refuse to allow the government to honor its financial obligations by borrowing money, investors will likely lose faith in the government and demand higher interest rates for Treasury bonds. Those bonds are the benchmarks for many other U.S. interest rates, including many mortgage rates. That means the cost of borrowing money to buy a house will increase, which could depress the housing market and slow our economic recovery.
The housing market accounts for only 3 percent or 4 percent of total U.S. spending, but it has a disproportionate importance to economic recovery. Spending on new homes typically rises quickly in a recovery because households usually feel more upbeat about their own prospects at the start of a recovery than during the preceding recession. These households then start to put more money into longer-term projects such as buying a new home. These actions ripple through our economy in forms such as more construction and construction-related jobs and increased spending on other items such as furniture and household appliances.
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