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October 15th, 2013

U.S. debt default ‘catastrophic’ for housing

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Housing Market Trending DownDisastrous, catastrophic and devastating.

Those were the big scary words Realtor Gary Thomas used to describe the impact a U.S. debt default would have on the economy and housing recovery.

Thomas, broker/owner of Evergreen Realty in Villa Park, Calif., and 2013 president of the National Association of Realtors, delivered that message in testimony Thursday during a hearing, “Impact of a Default on Financial Stability and Economic Growth,” held before the U.S. Senate Committee on Banking, Housing and Urban Affairs.

In his testimony, Thomas called on Congress to raise the nation’s debt limit in a timely manner to avoid a severe and drawn-out recession that would erase recent gains in housing.

A debt default would harm homeowners, who would lose value and equity, home buyers, who would face higher interest rates and tighter credit standards, and communities still recovering from the financial meltdown, Thomas said.

Housing recovery ‘in jeopardy’

The housing sector has been and will continue to be instrumental to the U.S. economic recovery since the Great Recession. However, housing is still “far from healthy” and the current momentum will be “in serious jeopardy” if Congress doesn’t resolve the debt limit issue, Thomas said.

“A default or even the perceived threat of a default could result in a harsh and long-lasting recession, which may be even more severe than the previous economic downturn,” he said.

A potential default could cause ‘major disruptions’

If Congress doesn’t raise the $16.7 trillion Treasury debt limit this week, the nation might default on some or all of its financial obligations.

It’s impossible to predict exactly what the impact might be, but “economic theory and evidence of significant economic disruptions resulting from the 2011 debt ceiling impasse, when Congress delayed raising the debt limit until the very last minute” suggest that financial market disruptions, reduced consumer and business confidence, and slower job growth could result, Thomas suggested.

An actual default…

An actual default would have a far greater and longer lasting impact than concerns about a potential default, he said.

“An actual default by the federal government along with a protracted government shutdown could have serious implications on the U.S. economy and may result in a recession even more severe than any since the Great Depression. This scenario may include higher interest rates, reduced consumer spending and business investment, diminished household wealth and high unemployment levels that could last more than a generation.”

Scary, indeed.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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