Natural disasters like hurricanes and snowstorms tend to temporarily halt housing market activity in affected areas. If the U.S. hits the debt ceiling, expect a similar effect on homebuying and selling activity, particularly in areas with a large number of people who are paid by the government.
If the United States breaches the debt ceiling, it would hit the housing market like a natural disaster. Whenever there is a major weather event, like a hurricane or snowstorm, the places directly in harm’s way see a steep decline in home selling and buying activity. For example, in October 2022, the number of homes that accepted an offer plummeted by over 50% year over year in the three Florida metros directly hit by Hurricane Ian, double the national decline. However, those markets mostly recovered by the new year. Hitting the debt ceiling would have a similar effect on the housing market. Home sellers and homebuyers would temporarily back off the market during the turmoil but would return once the dust settles.
Locations harmed most by debt ceiling crisis
The United States may breach the debt ceiling sometime between June and August, and if that happens, the U.S. may miss payments to federal workers, contractors and vendors, or Social Security recipients to avoid defaulting on its debt. The length and severity of this economic disaster would depend on how long it takes Congress to raise the limit, which hinges on bipartisan cooperation.
The economic harm would be most severe in places with a high concentration of federal employees, contractors, vendors and military personnel, such as Washington D.C. and Virginia Beach, VA. Anyone who is missing income would likely be reluctant to make a big financial commitment, like buying a home.
Areas with the highest shares of older people will face the most disruption from missed social security payments, such as Florida and Maine. Retirees who rely on social security income will be hesitant to spend, which would be a drag on the economies in these places. The slowdown in economic activity may slow down homebuying overall.
On the other hand, places like Salt Lake City and Minneapolis would be the least affected because they have relatively young populations and few federal employees.
Mortgage rate volatility
The broader housing market could still be affected by swings in mortgage interest rates. Fear about the U.S. defaulting on its debt would push rates up. That’s because the potential for default makes all U.S. investments riskier, including mortgages. However, increased recession risk would decrease mortgage rates. The White House has stated a debt default would result in millions of jobs lost and a decline in economic growth. In this scenario, rates would fall because the Fed would have to lower short-term interest rates to spur economic growth. The last time the debt ceiling was breached in August 2011, mortgage rates decreased.
What homebuyers should know
If you are planning on buying a home this year, there is a chance that you might be able to get a better deal on a mortgage rate if and when the debt ceiling is breached. So follow the news, and ask your lender to provide updated information on any changes in the rate they can offer. However, mortgage rates could go up instead of down. To have the best of both worlds, lock in your interest rate now with a float-down option. A float-down option will enable you to take advantage if mortgage rates fall.
However, even if you are lucky enough to get a relatively low rate, you may find that sellers have backed off the market because of economic uncertainty. The lack of inventory would be especially dire given that new listings are already down almost 20% from last year. A lack of supply could lead to more competition for homes on the market. To be prepared, get preapproved for a mortgage ahead of time and set alerts for homes that match your preferences on real estate apps like Redfin. That way, you can submit an offer quickly before someone else beats you to the punch.
What home sellers should know
With all the uncertainty around how big of an impact a breach of the debt ceiling might have on the economy and mortgage rates, I expect many potential home sellers to back off the market. If rates do fall, home sellers who brave the market may find themselves with multiple offers from buyers eager to take advantage of lower interest rates. However, if rates go up instead, home sellers may find it more challenging to match with a buyer.
Home sales and prices
All in all, I expect many potential home sellers to be scared off by the uncertainty. Sellers only have one chance to debut their home, while buyers can be more flexible about timing their offers. Therefore, I expect breaching the debt ceiling will constrict supply more than demand, and will negatively impact the volume of home sales more than level of home prices. And then once the debt ceiling is lifted, the housing market will return to normal, or at least normal for 2023.