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Government Shutdown on the Doorstep while Debt Ceiling Looms

The next several weeks will be all about the U.S. government, and this time we aren’t talking Federal Reserve. First up, we have a clash between House Republicans, Senate Democrats, and President Barack Obama on a resolution to continue funding the government.

The resolution in question is a fairly standard government funding process, but partisan bickering over the Affordable Care Act (known as Obamacare) has brought the bill into the national spotlight.

House Republicans have passed the “continuing resolution,” but have also tacked on a delay for the implementation of the health care law and a defunding initiative.

Senate Democrats reject the Affordable Care edits, and are lobbying for a “clean bill” that deals solely with the government budget.

The two sides have until midnight to figure something out or the government will lose its funding for the first time in seventeen years. The repercussions aren’t completely severe (“it’s business as usual for the most essential functions of government”), but there will be definite negative economic repercussions. One estimate pegs each week of government shutdown to a loss of 0.15% in economic growth over a year.

Read this article on CNBC for an overview of the process.

Next, we turn to an October 17 deadline for raising the government debt ceiling, so that the U.S. can borrow the funds necessary to pay off its debts. Failure to do so results in default. This process has markets seriously concerned.

From a CNBC overview of the issue:

Treasury bonds are viewed as the bedrock of financial markets, thanks largely to the assumption that the United States will always pay its debts. Most analysts say that if that were thrown into question, the consequences would be catastrophic, and largely unpredictable.

Sudeep Reddy at the Wall Street Journal wrote, “If a shutdown represents a controlled pullback, a default would be its homicidal, out-of-control cousin.”

The debt ceiling debate has been ongoing for several years now. Beginning in 2011, a Republic-led initiative tied debt ceiling increases to deficit reduction measures. The debate carried over to the “fiscal cliff” battle (remember that?) at the end of 2012.

Once again, it looks as though the debt ceiling process will be politicized.

This is partly why markets dropped to begin the trading day. Though the immediate effects of a government shutdown won’t be too severe, markets are concerned that the funding fight is a precursor to the debt ceiling debate – the consequences of which are much steeper.

Global markets would seize up, 32% of government spending would be cut (by one estimate), consumer confidence would plummet, interest rates would jump for the financial system. (And this is the best case scenario… scroll down in this Atlantic article for the worst)

[Read this Wall Street Journal article and this Atlantic article for more information.]

What happens to the housing market through all of this?

Well, in the event of a government shutdown, mortgage markets and real estate would be generally supported in the short term. Though, this doesn’t measure the effect that shaken consumer confidence can have on demand for real estate.

In recent times of economic uncertainty mortgage rates have done well, as investors buy into the “safe haven” of U.S. government-backed bonds. When the U.S. bond market (especially U.S. Treasuries and mortgage-backed securities) improves, mortgage rates feel downward pressure.

However, with the ability of the U.S. government to pay off its debt in question, the bond market looks a little less safe. And if the U.S. government defaults on its debts, mortgage rates will skyrocket as the bond market plummets and the cost of borrowing jumps.

 

We will be tracking the whole process on www.CentralCoastLending.com. Check in with us for more updates. 

Central Coast Lending is a California mortgage brokerage based in San Luis Obispo County. With offices in San Luis Obispo, Morro Bay, Paso Robles, and Arroyo Grande, Central Coast Lending is the top source for Central Coast mortgage, real estate, and home loan needs. 

 

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