A new analysis from Zillow, the real estate company, notes that a US government debt default, which could become a reality as soon as June 1 without intervention, could cause the typical cost of a mortgage to skyrocket by 22%.
The report indicates that mortgage rates rising above 8% would likely outweigh a small price decline to make buying a home a “even steeper hill to climb” and cause home sales to fall.
The US has never defaulted on its debt before, and it is highly unlikely that it willbut the analysis projects what could happen in the unlikely worst case of a prolonged default.
“Home buyers and sellers have finally been adjusting to mortgage rates above 6% this spring, but a debt default could further increase borrowing costs and freeze the marketsaid Zillow senior economist Jeff Tucker.
“Home values may not see a noticeable drop, but higher mortgage rates would severely affect affordability, especially for first-time buyers. It is vitally important to find a solution and not put more pressure on Americans who are striving to achieve their dreams of home ownership. “
Zillow explains that a debt default would almost certainly mean a severe disruption to the economy, with a ripple effect affecting the housing market: “A very likely consequence would be an increase in interest rates, including mortgage rates, as weakened confidence in the payment of Treasury bills means that investors will require a higher yield before buying them. Mortgage rates tend to follow Treasury rates and are expected to rise as a result.”
Homebuyers are already finding few options they can afford this spring, and it is estimated that a mortgage would cost 22% more in September in the event of a debt default. That adds up to an 82% increase over the past two years.
A sharp increase in mortgage rates, projected to reach a maximum of 8.4% in September in this scenariowould freeze sales in an already cool market, Zillow notes.
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