What Happens To the Housing Market If The US Defaults?
Speaking strictly in a “what if” mentality and not taking a side, one way or the other, this post is intended to give you some expert opinions on what happens if on August 2nd, no deal has been struck in Congress over the debt ceiling.
Just like the FAA has furloughed almost 4,000 due to a lack in funding, some speculate the Federal Housing Administration (FHA) may be deemed “non essential” as well. From an article written on The Mortgage Report (www.TheMReport.com):
David Min, associate director for financial markets policy at the Center for American Progress, aired the most recent concerns, warning in a June 20 paper that “[a] failure to increase the debt limit would force the federal government to shut down all government activities deemed ‘nonessential‘… including most administrative activities” at the FHA.
Freezing the FHA will lock up funding for would-be FHA buyers, keeping them out of the buyer pool for current housing inventory. Current FHA loans require a minimum of 3.5% down-payment, while other loan products require a minimum of 5%.
Here in Arlington, FHA buyers account for 15% of all 2011 sales year-to-date (197 of 1318). However, that number is slightly higher for Arlington Condos, which attracts more FHA buyers than other types of properties; through 2011, FHA buyers account for about 20% of the condo sales.
Another major hit would be interest rates. Jack Guttentag is a finance professor at The Wharton School at UPenn:
About 95 of every 100 home loans being written today are placed into mortgage-backed securities that are sold in the market with guarantees by Fannie Mae, Freddie Mac or Ginnie Mae. These are federal government guarantees, the value of which would drop like a rock with a default.
At best, the securities market would immediately demand a sizable rate premium on new guaranteed mortgage-backed securities to compensate for the added risk. This would immediately translate into sharply higher interest rates charged to new borrowers.