The debt ceiling and mortgage rates
The debt ceiling discussions in Washington are the biggest current story when surveying the real estate market and mortgage rates. Without a deal in place to raise the debt ceiling by June 5 (updated from June 1 by Treasury Secretary Janet Yellen), the US risks defaulting on its debt.
Let's start off with making sure everyone realizes this is not the first time the U.S. government has encountered a debt ceiling issue. Congress has raised the debt ceiling 78 times since 1960. And recent reports indicate that Congress appears to be close to reaching a deal. So if Congress is able to reach an agreement on raising the debt ceiling before the June 5 deadline, it's likely we will continue with the current status quo. Congress would then address the amount of government spending in its next budget proposal.
Again, should the United States government not reach a decision on raising the debt ceiling it risks defaulting on its debt which, for the purposes of this industry, would cause mortgage rates to spike.
To give a little background, the debt ceiling was created in 1917 under the Liberty Bond Act in response to government spending during WWI. It allowed the government to issue bonds and take on other kinds of debt without specific Congressional approval.
Think of it like a credit card you have. It allows you to temporarily borrow money that you promise to pay back in a certain period of time. If you don't pay it back immediately, you end up paying interest on that loan. If you don't pay it back at all, you risk severely hurting your credit and it becomes less likely that you'll be given loans in the future. Anyone who has ever tried to buy a house with less-than-ideal credit knows exactly why that's important.
The U.S. has a really strong reputation for borrowing money and paying back debts, so our government is given solid loan terms with low interest rates from its creditors (both foreign and domestic). Should the U.S. start to miss payments, and potentially default on the loans (not pay them back at all), that would cause economic volatility globally.
Furthermore, banks in the U.S. are some of the largest creditors for the United States' economy. Should the U.S. government not pay them back, that means banks will essentially freeze up and stop lending in order to avoid its own defaults. That would be a huge blow for an industry that is already struggling with holding deposits and staying afloat.
The way that affects mortgage rates is through government-backed bonds. People who invest in bonds are letting the government borrow their money for a fixed-term of anywhere from one month to 30 years, with interest. The riskier the bond purchase, the higher the interest. As we've discussed before, the 10-year Treasury note bond yield is considered the benchmark for the health of the economy and mortgage rates tend to follow along that line. If the U.S. defaults on its debt, it means those bond investments become much riskier and will spike the yield with mortgage rates likely following suit.
Freddie Mac's 30-year fixed-rate mortgage average moved up again for the week ending May 26, hitting 6.57%. Freddie Mac's economists said in their weekly statement that, "The U.S. economy is showing continued resilience which, combined with debt ceiling concerns, led to higher mortgage rates this week. Dampened affordability remains an issue for interested homebuyers and homeowners seem unwilling to lose their low rate and put their home on the market. If this predicament continues to limit supply, it could open up an opportunity for builders to help address the country's housing shortage."
Builders continue to show improvement in positivity with the latest index from the National Association of Home Builders showing a reading of 50 points for May—that's 5 points higher month-over-month and the 5th straight month of increases. This is also the first time that the sentiment reading has reached 50 points since July 2022. Anything above 50 is considered positive, and anything below 50 is considered negative.
