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Economists are sounding the alarm on what a debt default would mean for the housing market in the United States, warning that failure to raise the limit on government borrowing could result in a "major disruption."
On Thursday, Zillow senior economist Jeff Tucker said that if the U.S. defaults, home sales would decline sharply, with deficits of up to 23 percent, and home values could fall 5 percent below the baseline of what's expected should there be no default.
Congressional Democrats and Republicans are caught in a standoff over the decision to raise the government's borrowing cap before the country runs out of money to pay its bills—something that could happen as early as June 1.
Because the U.S. has never defaulted on its debt, it's hard to predict how deeply a default could impact the economy. Yet, Tucker notes that even a short default "would be enough to inflict a tremendous amount of economic damage."
David Stevens, the former CEO of the Mortgage Bankers Association (MBA) and a former Federal Housing Administration commissioner during the Obama administration, told Newsweek that Tucker's view is "spot on."
Tucker's report estimates that existing home sales volume would fall from a seasonally adjusted annual rate of 4.3 million in April to 3.3 million in September and that between July 2023 and December 2024, the decline in sales would be almost 12 percent of the 6 million sales projected for that 18-month span with no default.
"If the U.S. defaults on its debt, interest rates could skyrocket in the U.S.," Stevens said.
One of the most immediate consequences of a default would be a spike in interest rates across the board. Because the U.S. financial system relies on the assurance that Treasury debt is risk-free, investors will likely demand much higher interest rates on Treasury bonds to compensate for the new risk, Mark Zandi, chief economist at Moody's Analytics, testified before lawmakers earlier this month.
The spike in interest rates would extend to mortgage rates, credit cards and other borrowing costs, like personal or auto loans.
For a mortgage with a 30-year-fixed rate, Tucker estimates that interest rates could climb from the current 6.125 percent to 8.4 percent by September. While Zillow's projections put the peak around the low 8-percent range, Stevens thinks those numbers are a very uncertain guess and could be worse."
"This increase in rates would literally crush the housing market in the U.S. as buyers would no longer be able to buy, or simply not want to buy, at these high rates," Stevens told Newsweek.
Warning of a "deep freeze," Tucker said there is "little doubt" that a default would cause "a major negative shock to housing market activity."
It's not just interest rates that would soar if the U.S. were to default. Tucker estimates that unemployment would jump from the current 3.4 percent to 8.3 percent in October, at which point it would begin to decline. Federal benefits, like Social Security, Medicare and Medicaid, and food, veteran and housing aid, would also freeze in the case of default and there would likely be extreme stock market volatility.
"The severity of not paying our bills is the single greatest threat to middle-class Americans, retirees and small business," Stevens said. "It cannot be overstated how risky this would be."
Stevens said that the U.S. failure to pay its obligations could ultimately lead to a "black swan" event, which is a term economists use to describe an unpredictable event that is extremely rare, would have severe consequences and is likely seen as obvious in hindsight.
If that happens to be the case, it would "massively reshape how the nations around the world perceive any promises made by the U.S.," he said.
About the writer
Katherine Fung is a Newsweek senior reporter based in New York City. She has covered U.S. politics and culture extensively. ... Read more