Personal Finance Blog By MoneyRates - October 2013
October 16, 2013
More than two weeks into the federal government shutdown, and just hours before the deadline to raise the debt ceiling, signs that the budget crisis was affecting the everyday economy were becoming more apparent. One example was a sharp slowdown in purchase applications for mortgages -- and that could be just the beginning of the damage the fiscal dispute does to the housing market.
A dampening effect on mortgage applications
Despite the fact that current mortgage rates seemed to have stabilized after rising earlier this year, purchase mortgage application activity fell by 5 percent during the second week of October, according to the Mortgage Bankers Association (MBA). There are a number of reasons to suspect that the government shutdown contributed to this decline:
- The furloughing of a large block of government workers takes some potential demand out of all phases of the economy -- including the housing market.
- Uncertainty over the outcome of the budget dispute has made the public pessimistic -- and pessimistic people don't tend to make long-term commitments like buying houses.
- Some federal mortgage programs have been shut down or at least slowed by furloughs and funding cut-offs. Tellingly, the MBA reports that purchase applications in government mortgage programs fell by 7 percent during the same week that purchase application activity generally slowed by 5 percent.
Of course, application activity is just on the leading edge of the purchase process, so the impact of this slowdown on prices will become more apparent in the weeks and months ahead. Any reversal of housing prices could become a vicious cycle: As home values dip below mortgage balances, fewer people can take advantage of still-low refinance rates. Some of those who can't refinance may wind up in foreclosure, putting still more pressure on housing prices.
Woes may be just beginning
A slowing of purchase activity may be just the beginning of the housing market's woes. Forget about an actual default on U.S. debt obligations -- just the serious talk of a default may be enough to damage the country's credibility as a borrower. Credit concerns send interest rates higher, and anything that affects rates on U.S. debt tends to affect most interest rates in the U.S.
Current mortgage rates may seem stable, but the credit concerns this crisis has raised could send them higher. If the U.S. actually defaults, that increase in rates could come swiftly. If default is averted but budget squabbles continue to push government finances from one crisis to another, expect a slower but steady increase in mortgage rates over time.
From Federal Reserve intervention in mortgage-backed securities to special federal assistance for distressed home owners, the government has taken extraordinary steps in recent years to pull the housing market out of a tailspin. Over the last year it looked as though these measures had succeeded. However, it may prove that with one misadventure over the budget, the government has undone all the constructive work it had accomplished.
October 4, 2013
One of the dangerous things about the fiscal confrontations taking place in Washington is that depending on where you live and what you do, you might not immediately notice the shutdown of the federal government or the effects of a debt default. However, those actions could ultimately have severe impacts that last well beyond when an agreement is reached to resolve the immediate disputes.
One area likely to be impacted is interest rates. Whether you are a bank depositor wishing savings accounts could get a little ahead of inflation, or a home owner hoping to see attractive refinance rates in the future, Washington's brinksmanship may destroy those aspirations.
Potential effects of the shutdown
From savings accounts to refinance rates, here are some plausible effects of the current federal government curtailment, and of a possible default on U.S. government debt obligations.
- The shutdown is a further drag on economic growth. Some 800,000 government employees have been sent home, which is more jobs than the economy created in the last four months combined. In short, this shutdown could stop whatever momentum the economy has dead in its tracks. If this happens, depositors may have to live with near-zero interest on their savings accounts for a while longer. Homeowners may see the value of their properties start heading south again, which could prevent refinancing even if refinance rates are attractive.
- A default would shake up lender confidence. One thing that could send interest rates soaring despite a slow economy is if the confrontation in Washington goes to the next step of forcing a default on U.S. debt obligations by not raising the federal debt ceiling. For decades, U.S. Treasuries have been considered the most risk-free long-term investments available, because Uncle Sam was considered the most reliable borrower. If confidence in that borrower is shaken, lenders will demand more interest in the future. Rising U.S. Treasuries yields would force a host of other interest rates to rise along with them. Under this scenario, savings accounts could see higher interest rates, but at the cost of severe economic disruption.
- A compromised dollar would lead to inflation. Part of that disruption could be soaring inflation. The U.S. dollar has long been the world's reserve currency of choice, and the trading currency for major commodities, such as oil, around the world. However, if the financial backing of the dollar is called into question, demand for the dollar will suffer. This drop in demand would likely cause the value of the dollar to fall relative to other currencies, causing prices to rise. Inflation hurts borrowers and lenders alike, which is probably a hint to where the fiscal confrontation is heading -- everyone ending up a loser.
Given the amount of tough-guy posturing that has become a part of the budget confrontation, it seems as though some of the players fancy themselves as gunslingers facing off at high noon. The only problem is, this is the kind of unpredictable shoot-out in which innocent people tend to get hurt.