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Will the Real Estate Market Be Affected by the National Deficit?

by Guest on Aug 8, 2012 General Property 1044 Views

We’ve all heard about the national debt and it’s a serious issue that has the potential to affect every industry in the nation and that includes the housing and mortgage market. As we all know, the housing market has been through a lot lately with a high number of foreclosure and rapidly declining home values.

First of all, these guarantees secured by Fannie Mae and Freddie Mac will plummet because the U.S. government would have to default on some payments. This will affect a lot of home owners because the majority of all home loans are backed up by the above mentioned companies.

When the value of the securities do take a drop, then the securities market would immediately demand a much larger rate premium on new mortgage backed securities to compensate for the greater risk. As a result, borrowers will face much higher interest rates. The market will be affected for many years; it’s not just a one time thing.

U.S bond holders may demand higher interest rates since the government is having serious difficulty paying off this debt. This will ripple through all the markets and cause the further increase of interest rates in the mortgage market. It will be very hard for the government to recover and the entire nation will feel the effects; just about every industry will be affected by this,

As previously mentioned, the increase in interest rates could be as much as 1 percent. This could cause a 1 percent decrease in economic growth and the loss of 800,000 jobs a year. Many home owners also may not be able to pay the higher rates and we could see more foreclosures.

As this crisis plays out stocks, bonds and the dollar itself could plummet and all of this will continue to buffet the mortgage market. This will significantly affect everyone’s ability to borrow money regardless the reason. So lenders could demand that borrowers must provide more collateral which could force consumers to sell other investments. The worst case scenario is a crisis that would spread turmoil across markets much like the Lehman Brothers debacle did a few years ago.

Experts predict that the current looming debt could freeze the short term lending markets. Treasuries and other government-backed debt are used as collateral for loans and the value of these securities will be decreasing quite sharply because rating agencies will give a negative rating on the American debt.

This is a problem that goes far beyond debt and owing money. The serious aftermath of a U.S. government default will ripple through crevice and sector of the U.S. economy affecting everything including mortgage interest rates.

Can the housing market take another catastrophic blow? It has endured everything from a high number of foreclosures to a horrid economy to homes values which have decreased quite dramatically. We need to start taking the U.S debt problem seriously and tackle it heads-on because it will affect every part of our economy if we don’t.

Article source: http://www.appraisalarticles.com/General-Real-Property-Topics/3554-Will-the-Real-Estate-Market-Be-Affected-by-the-National-Deficit.html