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U.S. Default Seen Pushing Housing to the Brink

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By Steve Cook

“What the housing market needs now is more, not less, certainty, with respect to housing policy and access to capital via the mortgage markets. This will help stabilize housing prices, thereby helping households repair balance sheets and set the stage for more robust economic growth.”

Writing in Friday’s New York Times, economist Paul Krugman argues that a default would create a shock to the economy on a scale of the Great Recession or the Housing Crash of 2007. The default would put the burden of paying interest on Treasury bonds. Currently the cash-flow deficit is a bit more than 4 percent of GDP, which would have to be closed immediately and the government would then fall even further behind on its bills, he says.

“So, when did we last see a spending shock this big? As it happens, we’re looking at something just about the size of the post-bubble housing bust, which was also about 4 percent of GDP:

NAR’s Lawrence Yun describes a similar scenario. “Should the government decide to pay bills other than interest obligations, we can expect interest rates on Treasury bonds to rise as investors look for more return to compensate for the increased risk of their not getting paid. And if that happens, mortgage rates will rise, because mortgage rates follow Treasury rates.”

Yun says home sales can be expected to drop by 350,000 to 450,000 units for each 100 basis-point rise in mortgage rates.

For more information, visit http://www.realestateeconomywatch.com.

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