If the U.S. defaults on its debt, it could have potentially disastrous consequences for the already fragile U.S. housing market.
That’s according to a recent analysis from Zillow, which projected that home-buying costs could surge by a stunning 22% if Congress fails to raise the debt limit by June 1. On top of that, the 30-year mortgage rate would likely skyrocket above 8%, the highest since the early 2000s, according to the report, authored by Zillow senior economist Jeff Tucker.
Zillow laid out a bleak scenario for the housing market in the case of a first-ever debt default: Tucker projected 23% fewer sales of existing homes to a seasonally adjusted annualized rate of 3.3 million in September. And by the end of 2024, home values would be down about 5%.
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“Much uncertainty surrounds these estimates, but there’s little doubt that a default would be a major negative shock to housing market activity,” Tucker wrote in the report titled “A debt ceiling default would send the US housing market back into a deep freeze.”
The clock is running out for lawmakers to lift the debt limit: Treasury Secretary Janet Yellen reiterated a warning on Monday that it is “highly likely” the country will run out of cash to pay its debts in early June, potentially as soon as June 1.
“We have already seen Treasury’s borrowing costs increase substantially for securities maturing in early June,” Yellen warned in a letter to congressional leaders. “If Congress fails to increase the debt limit, it would cause severe hardship to American families, harm our global leadership position, and raise questions about our ability to defend our national security interests.”
The Zillow analysis comes amid a prolonged standoff over the debt limit. House Republicans passed a bill that raises the debt limit by $1.5 trillion, extending the current ceiling through March 2024, but coupled it with various spending cuts. President Biden and his fellow Democrats, who control the Senate, prefer a “clean” debt ceiling bill without spending cuts.
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The White House is now hosting near-daily talks with Republicans as Washington races to strike a budget agreement before the pivotal June deadline. House Speaker Kevin McCarthy, R-Calif., struck a more optimistic tone on Monday after the latest round of talks with the president, indicating that negotiators have narrowed their focus to a smaller group of key issues in order to strike a compromise.
“We’re getting closer. Don’t give up on us,” McCarthy told reporters on Monday, adding a “circle” of issues is becoming “smaller, smaller, smaller.”
DEBT CEILING SHOWDOWN RISKS TRIGGERING ‘SELF-INFLICTED’ RECESSION
Biden likewise called the meeting “productive,” and signaled that talks would continue in coming days.
“We reiterated once again that default is off the table and the only way to move forward is in good faith toward a bipartisan agreement,” the president said in a statement
If the U.S. failed to raise or suspend the debt limit, it would eventually have to temporarily default on some of its obligations, which could have serious negative economic implications. Interest rates would likely spike, and demand for Treasurys would drop; even the threat of default can cause borrowing costs to increase, according to the Committee for a Responsible Federal Budget.
While the U.S. has never defaulted on its debt before, it came close in 2011, when House Republicans refused to pass a debt-ceiling increase, prompting rating agency Standard and Poor’s to downgrade the U.S. debt rating one notch.
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