What Happens to Housing if the Debt Ceiling Isn't Raised?

I don't like to get political on this blog - I have my own opinions, others have their own as well, and I don't find it particularly useful to the goal of this blog, which is to present informative information to readers interested in the housing market, housing policy, and (to a lesser extent) mortgage lending.

But with all the hullabaloo in Washington DC surrounding the debt ceiling, I think it is useful to explore what might happen to the housing and lending market if the debt ceiling isn't raised.  As of this post, there are about five days remaining before America exhausts it's ability to borrow money and continue to meet it's already-appropriated obligations.

1.  Interest rates will surely rise.  If investors view the US economy as a riskier investment, they will expect higher yields for their money.  This scenario could very likely lead to an increase in mortgage rates as well.  An increase of just one percentage point on a mortgage will decrease the amount of money buyer's can borrow.  It will possibly price some buyers out of the market, which will exacerbate an already weak housing market.

2.  The small gains we have seen recently in new construction could be erased.  When the housing market burst in 2006/2007, new construction plummeted as well.  We have seen recent upticks in the number of new housing starts, and failure to raise the debt ceiling will likely cause developers to postpone new projects as they find financing harder and more expensive to come by.  This also puts construction workers out of a job, just when they need the jobs the most.

3.  Home prices could very likely fall.  We have seen a dramatic stabilization in home prices in the last two years, but if buyer's are unable to borrow as much as they previously were, fewer buyers will be in the market to purchase existing homes.  The laws of supply and demand tell us that if demand falls, so too will prices.

This is just the beginning of what could happen.  The housing market is fragile as it is, and an American default could very easily send the housing market back into the very doldrums it is trying to recover from.  By no means do I mean to fear-monger or frighten my readers, but the reality is that an American default has never happened before, and as a result it is difficult to predict what the fallout from such a scenario might be. 

Either way, the best we can hope for is for our elected officials to cease the current game of chicken and find some common ground - if only for the American people's sake. 

Foreclosure Filings Continue to Drop, But...

According to RealtyTrac, a real estate research company, foreclosure filings fell in Minnesota again, falling 14% compared to the same period last year.  This should come as welcome news as distressed properties have put significant downward pressure on the housing market over the past 4 years.

But there is a caveat with this seemingly welcome news:  Have foreclosures slowed because of structural improvements (improved economy, wage increases, principal write-downs, etc..), or have they slowed for some other reason(s)? 

It is increasingly looking like the latter is the case.  Most experts and analysts believe the precipitous drop to be the result of delayed processing and procedural changes in light of last year's robo-signing scandal.

The big picture here is that while some homeowners are benefiting by living rent-free for an extended period of time, we are far from out of the woods.  As I have previously described on this blog, there is a large inventory of "shadow foreclosures" - meaning homes that actually have been through the foreclosure process already, but banks are being slow and cautious in bringing them to market.  We also could see an uptick in foreclosure filings at any moment if the experts and analysts are correct in assuming that the drop was attributable to procedural/process-related events. 

Rental Vacancies Down, Rental Prices Up

I'm going to veer slightly off-course in this post and touch on the rental market.  I primarily assist home buyers and home sellers, but changes in the buying/selling market have effects on the rental market, so this conversation seems worthwhile.

New data out this week affirms what I predicted several months ago:  prices for rental housing have climbed substantially as the economy continues to feel the damaging effects of the housing bubble.  Apartment vacancies fell to 6.2% at the end of June, which is down significantly from 7.8% just a year ago. The effective rental price climbed to $997 per month, up from $974 the previous year. 

So what are the long-term implications of this trend?  As more and more individuals move away from home ownership and into rentals, the supply of home buyers dwindles.  With housing inventory still near record-highs, this could continue to exacerbate the precipitous decline in housing prices we've seen over the past 3 or 4 years.  It could also have serious effects on neighborhoods and communities as houses sit vacant for months, welcoming burglaries and crime.

The conclusion to this story is that having fewer and fewer home buyers will only prolong the already tepid housing market recovery.  It will be very interesting to see how this dynamic continues to play out over the next several months.