By Christian E. Weller | May 24, 2011
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Houses across the country are on display this spring and summer during the annual real estate market’s busiest time of year. But hoped-for sales of new and existing houses—and the benefits this brings to the broader U.S. economy—could well be dashed by the Republican majority in the U.S. House of Representatives, which continues to toy recklessly with the idea of not raising the federal debt ceiling.
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. 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.
The connection between the debt ceiling, the housing market, the construction industry, and the broader economy is the rate of interest paid on U.S. Treasury bonds and home mortgage rates. Failing to raise the federal debt ceiling, which is the maximum amount that the federal government can borrow without additional congressional action, would cause interest rates to climb, perhaps sharply, and they would remain higher than they otherwise would. Mortgage rates, among other interest rates, would rise alongside interest rates on U.S. Treasury bonds, making homes less affordable and depressing house sales and prices. The housing market double-dip decline that many fear would quickly become a reality, destroying even more of families’ home equity, slowing the economic recovery, and cutting much-needed jobs.
This issue brief will examine these links in detail, but a quick overview of the data presented here demonstrates the following:
- Mortgage interest rates will rise more than U.S. Treasury rates. An increase in the 10-year Treasury rate by half a percentage point—which is likely if the debt limit isn’t raised—could translate into a jump in the mortgage rate equal to 0.66 percentage points, increasing mortgage rates by close to 14 percent from their current levels to their highest levels since 2008.
- Mortgage rates will remain high for some time. Shocks to Treasury rates typically translate into mortgage rates rising and staying high. The housing market would consequently not get a reprieve once the federal government has to delay debt payments— even if the debt ceiling is eventually raised.
- New home sales could drop to new record lows. The relationship between mortgage rates and new home sales over the past decade suggests that between 27,300 and 31,600 fewer new homes will be sold in 2011 because of the increase in mortgage rates.
- Existing home sales will decrease. Higher mortgage rates will slow the sales of existing homes, such that between 92,700 and 129,500 fewer homes will be sold. The drop in existing home sales will contribute to lower prices.
- House prices will drop in the wake of fewer sales. House prices will drop as owners, developers, and builders looking to sell houses will find fewer buyers. Lower house prices will put more mortgages “underwater”—homeowners owning more than their homes are worth—lowering the incentives for homeowners to stay current with their mortgages. This could keep mortgage delinquencies and foreclosures near record highs.
- The economy will suffer. Count on a repeat of the recent housing market-led downturn of the economy. The housing market’s decline during the Great Recession of 2007- 2009 dragged down the economy for long afterwards. The economy would have been $222 billion larger (in 2011 dollars) than it was in March 2011without the decline in new home sales and home extensions alone from December 2007 to March 2011.
- Construction jobs would disappear again. Residential construction jobs fell by 1.1 million from December 2007 to December 2010, accounting for 13.9 percent of the job losses during this period. Residential construction employment has only started to level off in the spring of 2011, putting an end to more than three years of massive job losses. A double dip in the housing market—fewer sales and lower prices—would send construction employment lower again.
To read more about the consequences of each of these effects, click here.
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