A new analysis by economists at listings portal Zillow has calculated that the monthly mortgage payment for the median-priced home would rise 22 percent by September if Republicans in Congress refuse to raise the debt ceiling within the next few weeks.
Part of that would be driven by another steep rise in mortgage rates, Zillow’s economists predict, with the average rate on a 30-year, fixed-rate loan likely to top 8.4 percent as investors – their confidence shaken in their ability to get a return on U.S. Treasury securities – demand higher interest rates from the U.S. government in return for lending it money in the future. The way in which Treasurys are deeply woven through the American financial system means that increases in the interest rates buyers demand on them push up rates on most other forms of debt.
The debt ceiling is a statutory cap on how much the United States can borrow, but an increase in the debt limit would not authorize new federal spending; it would only allow for borrowing to pay for what Congress has already approved.
“Home buyers and sellers finally have been adjusting to mortgage rates over 6% this spring, but a debt default could potentially raise borrowing costs even higher and send the market into a deep freeze,” Zillow senior economist Jeff Tucker said in a statement. “Home values might not see a notable drop, but higher mortgage rates would severely impair affordability, for first-time buyers especially. It is critically important to find a solution and not put more strain on Americans who are striving to achieve their homeownership dreams.”
Higher mortgage rates also discourage homeowners, many of whom locked in their loans when mortgage rates were near 3 percent, from selling and reentering the market when their new loan would be much more costly, Zillow economists predicted, in addition to further eroding the ability of buyers of all stripes to afford a home at today’s prices. Those prices, Tucker said, would likely stay high thanks to the extremely limited number of homes that would be available on the market.
Tucker and his colleagues said they expect home sales – already at a low ebb – to drop a further 23 percent if the Biden administration, Democrats in Congress and their Republican counterparts don’t come to an agreement soon.
The Treasury Department has said the debt ceiling must be raised by June 1 to avoid financial chaos.
“I’m confident that we’ll get the agreement on the budget and America will not default,” Biden said from the Roosevelt Room of the White House yesterday.
Later Wednesday evening, negotiations resumed behind closed doors at the Capitol.
In exchange for lifting the debt limit to keep paying the bills, newly majority House Republicans are trying to extract steep budget caps of no more than 1 percent growth a year over the next decade, alongside bolstered work requirements for programs like federal unemployment benefits.
The Associated Press contributed to this report.