Odds are you have you seen something like this image over the past couple of days.
The several months long negotiation in Congress over how to raise the debt ceiling all came to a close early last week. The stock market responded negatively to the news of spending cuts while the economy is still recovering from a recession. And to add to the doom and gloom status of American affairs, the rating agency S&P dropped the US Government’s credit rating from the risk free level of AAA to the not quite as risk free level of AA+.
In theory, the downgrade should increase the interest rate that the government has to pay to borrow money. That increased rate should then “trickle” down to all other interest rates that are based on it, which include mortgage rates. Higher interest rates mean it costs more to buy a house, which in turn means fewer people can afford to do so.
The good news? The government’s interest rate hasn’t really increased, nor have mortgage rates. As you can see, mortgage rates have actually stayed at their historically low levels, if not a little lower.
Why is that? I don’t want to get into the nitty, gritty details, but you can read more about them in Nate Silver’s expert explanation. The long and short of it, nobody but S&P actually thinks that the US government’s debt is more risky than it was two weeks ago. S&P is reacting more to consumer/public expectations of the overall state of affairs, and that my friends is where the impact to real estate could come in.
Over the past several days we have been speaking to more and more clients that are putting their house hunt on hold because they want to wait out this tumultuous time. It seems that uncertainly has taken hold over the market and we may be heading towards a second “great recession”.
The foreclosure mess still casts its shadow over the entire market as people are, rightfully, concerned to purchase a home when that home’s price could easily fall in the near term. Combine that with the uncertainty in the stock market and about US politics in general, and demand is going to fall…