US Default Would Be a Lose-Lose for Housing, Predict Analysts: Mortgages to Surge 22%, Prices to Remain High

In the event Congress fails to lift or suspend the debt ceiling which would cause the United States to default on its federal debt, mortgage rates could reach 8.4%, sending the mortgage payment on a typical home 22% higher by September, according to a projection by real estate marketplace company Zillow Group Inc ZG.

The firm's analysis shows that home values would not lose much ground but a sharp rise in mortgage rates would damage housing affordability.

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It is noteworthy that following Tuesday's inconclusive talks on the debt ceiling crisis, the much-awaited meeting between President Joe Biden and House Speaker Kevin McCarthy scheduled on Friday has been postponed with both leaders having agreed to meet early next week.

Aides from both sides have begun discussing ways to limit federal spending, Reuters reported.

The default appears to be an unlikely scenario but Treasury Secretary Janet Yellen, while speaking at the meeting of Group of Seven finance officials, acknowledged that failure to avert a looming default would spark a global downturn, risk undermining U.S. global economic leadership and raise questions about its ability to defend national security interests.

Home Values: Zillow estimates that if the U.S. were to default, home values would start falling 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," it said.

“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.

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