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Sunday, January 29, 2023

Will the 2023 Debt Ceiling Debate Have an Impact on Mortgages?

Debt Ceiling Debate 2023

Will the 2023 Debt Ceiling Debate Have an Impact on Mortgages?

Every economic decision has a trickle-down effect on all aspects of the economy. When it comes to the debt ceiling issue, homeowners should pay attention—especially if they plan on moving in the next 3-5 years. The government’s ability to pay its debts matters, as it owns mortgage debts through specialized programs and sponsors mortgage programs like Fannie Mae and Freddie Mac.

What is the Debt Ceiling?

What is debt ceiling

For context, the “debt ceiling” is the U.S. Congress’s term for blanket approval to spend money. In the 1800s, Congress had to approve every debt issuance to handle its spending on a case-by-case basis. That stopped in 1917 with the passage of the Second Liberty Bond Act. Now, Congress votes on the issue of borrowing to pay for spending in big chunks –until a certain point.

Enter the “debt ceiling.” As the U.S. government borrows more and more, the debt inevitably crawls up to the most recently approved debt ceiling. In the most recent case in 2021, Congress voted to elevate the debt ceiling—for a period lasting through early 2023. We’re now at that date.

Why the Debt Ceiling Matters Now

Technically, we’ve already hit the debt ceiling. As Secretary of the Treasury Janet Yellen predicted, the U.S. hit the debt ceiling on January 19, hitting the cap of $31.4 billion. Yellen then promised Congress that her department would take “extraordinary measures” to keep the U.S. solvent until June. But in June, the U.S. could potentially start defaulting on its debt payments.

Before then, the U.S. can cut a few corners to stay solvent, including slowing investments in federal pension funds. But when the U.S. does start defaulting on its debts, it can set off a series of chain reactions that Yellen said might cause “irreparable harm” to the economy.

That’s where the average investor and home buyer comes in. They’re the individuals participating in that economy, and that “irreparable harm” could manifest in the mortgage market.

How the Debt Ceiling Could Impact the Mortgage Market?

How debt ceiling could impact the Mortgage Market

First, we need to understand where the mortgage market stands. In recent months, we’ve seen mortgage rates creep up, just as the Federal Reserve has raised its base interest rates to combat inflation. At present, that trend isn’t slowing, and interest rates will likely go up again. The cost of borrowing money to buy a house is rising along with the price of everything else.

As SFGate.com notes, “Mortgage rates reached a 20-year high this fall in response to the Federal Reserve’s repeated interest rate hikes, which were aimed at curbing inflation.” However, rates have also started declining more recently, averaging 6.15% for the week ending January 19.

If the U.S. does default on its debts, it could create some problems for housing, starting with the interest rates. Mortgage rates tend to track what’s going on in the economy, mimicking the ups and downs of the 10-year treasury.” Note: the 10-year treasury is the cost of a U.S. treasury bond for 10 years. If you were to buy a 10-year treasury, you would expect the U.S. to pay you back that cost in interest.

Treasuries can be a little counterintuitive, however. As demand for them decreases, the yield (or the interest you earn from holding a treasury) increases. This creates a general cycle: the more pessimistic investors are about the prospects of the U.S. making good on its debt, the higher interest rates tend to go.

You might be able to piece it together from here. If trust in U.S. debt fails, it would lower demand for U.S. treasuries. This would push up the yields on those treasuries, leading to higher interest rates—and higher mortgage rates for anyone looking to borrow money for a home.

Important Dates to Watch

Important dates to watch

If you’ve been paying attention to headlines from Washington over the last few months, you know that this isn’t the first time there’s been contention about the U.S. debt limit. In 2011, for example, there was the potential threat of the U.S. defaulting on its debt. Ultimately, Congress passed a new debt ceiling, and the cycle began again.

Of course, each new debt ceiling limit is temporary, which means that it is time for Congress to renew this limit. This year’s timeline of when mortgage rates may be under threat has already started, as the U.S. hit the debt limit on January 19. That’s triggered a countdown, as the U.S. has until June 2023 until it will have to begin defaulting on debts, which will drive a lack of confidence in U.S. treasuries moving forward.

This presumes that Congress doesn’t take any action. With potential consequences in the mortgage market and other sectors of the economy, homebuyers can generally expect that Congress will find a way to pass a new debt limit. However, if they don’t, it could mean chaos in markets come summer.

Plus, the longer the time passes without the government taking action, the greater the uncertainty in the U.S. economy, which keeps all financial markets unstable. If the debt ceiling debate keeps going into the future, home buyers may want to start planning for the possibility that mortgage rates could be higher in late 2023.

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Preston Guyton

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