A debt default is very unlikely, but new
scenario projections from Zillow show sales would decrease sharply
as mortgage costs balloon
- Mortgage rates could reach 8.4% in the unlikely event of a debt
default, sending the mortgage payment on a typical home 22% higher
- Home values would not lose much ground, according to Zillow's
analysis, but a sharp rise in mortgage rates would do further
damage to housing affordability.
- Home sales activity might fall by nearly one-quarter from
current projections at its lowest point, in September.
SEATTLE, May 11, 2023
/PRNewswire/ -- The U.S. government defaulting on its debt, which
could become a reality as soon as June
1 without intervention, could send the typical cost of a
mortgage soaring by 22%. Mortgage rates rising above 8% would
likely overwhelm a small price dip to make affording a home an even
steeper hill to climb and send home sales tumbling, according to a
new Zillow® analysis.
To be sure, the U.S. has never before defaulted on its debt, and
it is very unlikely that the U.S. will fail to pay its debts now.
This analysis projects what might happen in the unlikely worst-case
scenario of a prolonged default, and it is not a prediction that a
default will occur.
"Home buyers and sellers finally have been adjusting to mortgage
rates over 6% this spring, but a debt default could potentially
raise borrowing costs even higher and send the market into a deep
freeze," said Zillow senior economist Jeff
Tucker. "Home values might not see a notable drop, but
higher mortgage rates would severely impair affordability, for
first-time buyers especially. It is critically important to find a
solution and not put more strain on Americans who are striving to
achieve their homeownership dreams."
A debt default would almost certainly mean severe disruption for
the economy, with the ripple effects taking their toll on the
housing market. One highly likely consequence would be rising
interest rates — including mortgage rates — as shaken confidence in
Treasury bills being repaid means investors would require a greater
return before purchasing them. Mortgage rates tend to follow
Treasury rates and would be expected to rise as a result.
Home shoppers already are finding few options they can afford
this spring, and it's estimated that a mortgage would cost 22% more
in September in the event of a debt default than it otherwise
would. That's on top of an 82% rise over the past two years.
A steep rise in mortgage rates — projected to peak at 8.4% in
September in this scenario — would freeze sales in an already
chilled market. If the affordability mountain grows even taller,
fewer would-be buyers will be able to purchase a home. Higher
mortgage rates also discourage homeowners, many of whom locked in
their loans when mortgage rates were near 3%, from selling and
reentering the market when their new loan would be much more
Zillow projects this combined impact of buyers and sellers
pulling back would wipe nearly one-quarter of expected sales off
the board in some months. If there were to be a debt default, the
biggest projected deficit would come in September, with an
estimated 23% fewer existing home sales.
The thin silver lining for the overall health of the housing
market is that Zillow economists don't expect home values would
lose much ground, even with a default. Home values have turned the
corner this spring, returning to growth near historical norms after
a period of overheating and then a short-lived downturn. Home
values tend to fall sharply when there is a glut of listings
flooding the market, but very low inventory in this scenario would
act as a parachute, keeping prices from falling too far, too
Zillow forecasts that if the U.S. were to default on its debt,
home values would begin to fall starting in August, but only by 1%
from current levels through February
2024. Even in this pessimistic scenario, home values are
expected to rise 1% from today to the end of next year. That's down
from a current expectation of 6.5% growth over that period.
About Zillow Group
Zillow Group, Inc.
(NASDAQ: Z and ZG) is
reimagining real estate to make home a reality for more and
more people. As the most visited real estate website in
the United States, Zillow
and its affiliates help people find and get the home they
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easier buying, selling, financing and renting
Zillow Group's affiliates, subsidiaries and brands include
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All marks herein are owned by MFTB Holdco, Inc., a Zillow
affiliate. Zillow Home Loans, LLC is an Equal Housing Lender, NMLS
#10287 (www.nmlsconsumeraccess.org). © 2023 MFTB Holdco, Inc., a
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