A debt default would lead to mortgage rates of 8% or higher, burdening homebuyers.

Based on new Zillow research, the US government debt default, which could become a reality as early as June 1, 2023 without intervention, could cause the typical cost of a mortgage to skyrocket by 22%. Mortgage rates above 8% are likely to overwhelm a small price decline , making it even more difficult to acquire a home and causing home sales to fall.

It is important to note that the United States has never defaulted on its debt and is very unlikely to default on its debts now. This analysis projects what could happen in the unlikely worst-case scenario of a prolonged default, and is not a prediction that a default will occur.

"Home buyers and sellers have finally been adjusting to mortgage rates above 6% this spring, but a debt default could drive up borrowing costs even higher and freeze the market." said Zillow chief economist Jeff Tucker. "Home values ​​may not see a noticeable drop, but higher mortgage rates would severely impact affordability, especially for first-time buyers. "It is vitally important to find a solution and not put more pressure on Americans struggling to achieve their dreams of homeownership."

A debt default would almost certainly mean a serious disruption to the economy, with knock-on effects that would affect the housing market. A very likely consequence would be rising interest rates, including mortgage rates, as a lack of confidence that Treasury bonds will be repaid would cause investors to demand better performance before purchasing them. Mortgage rates tend to follow Treasury bond rates and are expected to rise as a result.

Home buyers are already finding few options they can afford this spring, and it is estimated that a mortgage would cost 22% more in September in the event of a debt default than under normal conditions. This adds up to an 82% increase in the last two years.

A significant increase in mortgage rates, projected to peak at 8.4% in September 2023 in this scenario, would freeze sales in a market that is already tepid. cooled. If the affordability mountain becomes even higher, fewer potential buyers will be able to purchase a home. Higher mortgage rates also discourage homeowners, many of whom took out their loans when mortgage rates were around 3%, from selling and returning to the market when their new loan ;this would be much more expensive.

Zillow projects that this combined impact of reduced buyers and sellers would wipe out nearly a quarter of expected sales within a few months. In the event of a debt default, the largest projected shortfall would occur in September, with an estimated 23% fewer existing home sales.

What's not encouraging for the overall health of the housing market is that Zillow economists don't expect home values ​​to lose much ground, even in the event of a debt default. Home values ​​have turned a corner this spring, returning to near historical norms after a period of overvaluation and then a brief decline. Home values ​​tend to fall sharply when there are excess listings flooding the market, but the shortage of inventory in this scenario would act like a parachute, preventing prices from falling too fast or too far.< /p>

Zillow predicts that if the United States 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 increase 1% between now and the end of next year. This represents a decrease compared to the current expectation of 6.5% growth in that period.