WASHINGTON (MarketWatch) — The housing market has been hit by uncertainty and a partial government shutdown in recent weeks, and things could get worse if Congress is unable to reach a deal that raises the U.S. debt ceiling. While Republicans and Democrats bickered in recent weeks over government funding and the debt ceiling, investors traded down shares of home builders and related stocks. Shares of the iShares U.S. Home Construction ETF ITB -2.39% were recently off about 7% from a mid-September peak, compared with a decline of less than 1% for the S&P 500 SPX -0.71% , while shares of the SPDR S&P Homebuilders ETF XHB +0.17% were down almost 6%. Although Senate leaders were optimistic Monday about prospects for a deal, on Tuesday Majority Leader Harry Reid said Republicans were trying to “torpedo” progress. With no clear way forward in Washington, the housing market has already faced challenges from a partially shut down government that slowed the mortgage-approval process. And looming large is the threat of a U.S. debt default, which could push the U.S. toward a recession, cripple consumer confidence and hit mortgage rates, stalling the housing market’s recovery. Complicating matters is uncertainty about how a default could impact longer-term Treasury yields and mortgage rates. Changes in rates for fixed-rate mortgages closely track yield trends for the 10-year Treasury note. While many economists expect that a default would lead to a spike in rates, there could also be a flight to the seeming safety of longer-term notes, as was seen during 2011’s drawn-out fight over the deficit. Unfortunately, much is unknown about a long list of key factors, such as the duration of a default. There’s also the extent to which markets have already priced in various scenarios, and whether investors believe that a default of a few days or even weeks contains any meaningful signal for whether the U.S. would eventually pay its debt. Click to Play A senior housing stock with a 30% upside Senior housing might not sound like the most exciting investment, but how does a 30% upside sound? Barrons Jack Hough has details on MoneyBeat. Photo: Getty Images. “Market participants would probably continue to draw some distinction between Treasury securities where payments are falling due shortly and those whose servicing is unlikely to be affected by a short-lived default,” according to a recent note from Capital Economics analysts. Then there’s Congress’s fight over funding the government’s operations. If lawmakers agree to a serious reduction in government spending, such a move could take its own toll on the housing market’s rebound. Spending cuts that lead to slower near-term economic growth and more unemployment would create a negative “feedback effect” on housing, said Dean Baker, co-director of the Center for Economic and Policy Research, a Washington think tank. Last, but certainly not least, is the Federal Reserve and its massive asset purchases that have helped keep long-term rates low. Although central-bank officials recently considered paring down their $85 billion-per-month asset-buying program, a market in turmoil could lead to them expand purchases, offsetting the default’s impact on rates. “The Federal Reserve could ramp up their [mortgage-backed security] purchases, which could mitigate some of the increase in interest rates,” said Mark Zandi, chief economist of Moody’s Analytics. Lingering impact from default Many economists expect a default to lead to higher rates, an effect that could linger even after lawmakers eventually reach an agreement. “I would expect the risk premium to come down, but not go down to zero because investors will look back and say: ‘Gosh, these people in Congress actually allowed the U.S. Treasury to default once, they could do it again,’” said Frank Nothaft, chief economist at federally controlled mortgage buyer Freddie Mac FMCC +3.33% . He said a default could lead the 10-year Treasury yield, which recently hit about 2.69%, to rise by half of a percentage point, sending rates for new mortgages higher, too. CEPR’s Baker said a default, which he thinks is unlikely, could lead to an immediate increase of 20 basis points for rates on a fixed-rate mortgage. “Getting a mortgage that day may not be a good idea,” Baker said, adding that he sees that increase eventually narrowing to about 10 basis points. “Things will settle back down pretty quickly,” he said. During the recent partisan battles over spending, the yield on the 10-year Treasury note 10_YEAR +1.56% has been less responsive than shorter-term-debt rates. However, Capital Economics analysts said the 10-year Treasury yield could quickly rise to between 3% and 4% after a default. Adjustable-rate mortgages could also become pricier the next time borrowers’ rates change. “A default would raise the cost of government borrowing, and that would have an immediate effect on mortgages,” said David Crowe, chief economist of the National Association of Home Builders, a Washington-based trade association. The average rate for a 30-year fixed-rate mortgage recently hit 4.23%, a relatively low rate, by historical standards, according to Freddie Mac. But if mortgage rates spike, adding one or two points, would-be buyers will face escalating monthly home-loan payments. Rate volatility and a default could also lead to consumers becoming increasingly concerned about their financial prospects and stability, reducing their appetite to spend and take on much debt. “If a default happens, of even if a shutdown continues without a default, we’ll see it affect consumer confidence, and that affects all kinds of purchases, both small and large,” said Jed Kolko, chief economist at real estate site Trulia. Ruth Mantell is a MarketWatch reporter based in Washington. Follow her on Twitter @RuthMantell.
Posted on: Tue, 15 Oct 2013 21:05:58 +0000
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