What a government shutdown or default could mean for buying a home

President Biden and House Speaker Kevin McCarthy, a Republican from California, have locked horns on the $31.4 trillion debt ceiling. If Congress refuses to increase it, it could force the government to shut down and risk defaulting on its debts as early as June 1.

The federal government has experienced four closures in 30 years. There has never been a default, that time when the government cannot borrow money to pay its bills.

Either we could slow down an already sluggish residential real estate market, and the longer the shutdown lasts, the slower it will be.

For sellers and home buyers, the consequences could prove frustrating.

In the event of a shutdown, the U.S. Department of Housing and Urban Development will have a limited staff and will stop processing home equity conversion or “reverse” mortgages. “Because we are able to approve most single-family loans, we do not expect the impact on the housing market to be significant, as long as the shutdown is brief,” HUD said in an explainer. “With each day the shutdown continues, we can expect increased impacts on potential homeowners, home sellers and the wider housing market.”

About half of mortgages are backed by the federal government (FHA, VA, etc.), with many taken out by low-income buyers and first-time buyers.

The limited staffing of the Internal Revenue Service could also slow or stop real estate transactions involving tax liens.

Guaranteed Rate mortgage creator Shant Banosian said the consensus in his industry is that already high mortgage interest rates would rise significantly if the government defaults and/or shuts down – from 6.39% now for a loan to 30-year fixed rate at 8.5% or even higher – which would eliminate many buyers from the market.

“I also think the stock market would pull back like it did last time around,” Banosian said. “In 2011, when they were close to closing, the stock market was down about 15-20%. You would see the housing market really stall.

Scott Kriss, owner of Kriss Law | Atlantic Closing & Escrow, said a shutdown would be disastrous for the real estate market in the short term, and the longer it lasts, the worse it will be.

“They have to figure that out,” Kriss said. “We are hanging by a thread here in the real estate market. And if the government shuts down and we don’t pay our debts, that’s going to put us in a place where we don’t want to be.

“I don’t care about your politics, it won’t be good for anyone.”