The housing market correction will get new life if the US defaults, says Moody’s chief economist

A US default could send mortgage rates rising again. Getty Images

Speaking before Congress earlier this month, Moody’s Analytics chief economist Mark Zandi told senators that by his calculation, the US Treasury could run out of money as soon as early June. If Congress does not act, and the United States defaults, there will be major economic consequences.

One of the most vulnerable areas of the economy is the US housing market.

See, in the unlikely scenario that the U.S. Treasury should default—or even appear to default—the financial markets, Zandi says Fortune, would put upward pressure on long-term interest rates such as mortgage rates. The average 30-year fixed mortgage rate, at 6.55% as of Friday, he says, could move back above 7% if a default looked likely.

Another big jump in mortgage rates would be a gut punch for many home buyers and sellers, who were hit by last year’s mortgage rate shock. Already, national housing affordability (or rather, the lack of affordability) has reached levels not seen since the housing bubble era. If mortgage interest rates were to rise again, housing affordability could weaken to a level that exceeds the bubble.

If mortgage rates were to go higher, Zandi says, it would accelerate the ongoing correction of the housing market – which lost some momentum this spring. (The latest forecast produced by Moody’s Analytics, which does not take into account a default, expects US home prices – already down 3% from their peak in 2022 – to fall 8.6% from peak to trough this cycle).

Zillow is also concerned.

On Thursday, Zillow published an article headlined: “A debt ceiling default would send the US housing market back into a deep freeze.”

While Zillow economist Jeff Tucker acknowledges that a U.S. default would be “unlikely,” he agrees that it would see mortgage rates rise and send the housing market back into a sharp downturn.

“If the United States were to enter default in the coming months, an almost certain consequence would be rising debt yields and interest rates… Introducing default risk, or at least the risk of delayed coupon payments, would be like an earthquake that rattles the bedrock assumption , sending ripples through the financial system and causing investors to question the safety not only of T-bills but other assets as well. Critically for the housing market, mortgage rates will almost certainly rise at the same time,” writes Tucker.

If the U.S. were to default, Zillow predicts the average 30-year fixed mortgage rate would rise to a peak of 8.4% by September, while home sales volume would fall 23%. As for home prices, Zillow believes a default would cause national home values ​​to drop another 1%.

“Any major disruption to the economy and debt markets would have major consequences for the housing market, cooling sales and raising borrowing costs, just as the market was beginning to stabilize and recover from the big cooldown in late 2022,” writes Tucker.

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