Should Homebuyers Care About Debt Ceiling Debate?

When President Joe Biden was trying to pressure Republicans into supporting Democrats’ efforts to raise the debt ceiling, he warned of ominous outcomes should the effort fail.

“People may see the value of their retirement accounts shrink. They may see interest rates go up, which will ultimately raise their mortgage payments and car payments,” Biden said. Is that true?

Political pundits on both sides of the aisle appear to agree the debt ceiling will get lifted, one way or another.

“It has to be done, it will be done. The debt ceiling will be raised,” Fox News’ commentator Brit Hume said Monday night. “This will get done.”

But what if something goes wrong in Washington, DC — hardly an unusual occurrence.

“If the worst were to materialize and a federal government default occurred, one likely impact would be that these rates spiral higher, adding to the cost of future borrowing and home purchases,” said Bankrate’s Washington bureau chief Mark Hamrick. “That’s just one aspect of the likely crisis which would include damaging impacts on the broader economy such as job loss. These disasters would be entirely ‘man-made’ and must be avoided.”

In a letter to her House colleagues, Speaker Nancy Pelosi notes a statement from the Joint Economic Committee saying a default would “likely prompt a lasting downgrade of America’s credit, drastically increasing costs for car loans, mortgages, car loans, student loans, credit card bills and other borrowing.”

Moody’s sees a similar outcome. “Treasury yields, mortgage rates, and other consumer and corporate borrowing rates spike, at least until the debt limit is resolved and Treasury payments resume,” they say in a newly-released report.

Then there are the indirect impacts on mortgage rates and home values.

Mark Zandi, chief economist at Moody’s, predicts that a long, drawn-out debt ceiling battle could cost the U.S. economy up to 6 million jobs and wipe out as much as $15 trillion in household wealth. That would almost certainly drive down demand for home purchases and with it, home values.

While the story is often presented as the GOP “blocking” the debt ceiling vote, in fact Democrats have the votes they need to lift it themselves, though they would prefer to have Republican votes, too. As Punchbowl News reports:

“Democrats knew this moment would arrive when they passed their $3.5 trillion budget resolution two months ago. They could’ve included debt-limit instructions in that resolution and they didn’t. They wanted to spare vulnerable 2022 incumbents a tough vote.”

It appears Democrats can’t avoid that vote as Senate Minority Leader Mitch McConnell holds his caucus together on the sidelines. But while they may not like the politics, it appears they will get the debt ceiling lifted and a crisis for homebuyers will be averted.