The current government shutdown is disrupting the economy in a number of ways. Among the most notable: the nation’s debt is growing. The Treasury Department said Thursday that the national debt has topped $38 trillion, a record level of federal indebtedness. While this may seem like an issue in your everyday life, it can affect the housing market and mortgage rates.
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Although mortgage rates have been on the decline recently, if you’re still hoping for a sharp drop in interest rates, the odds are fading fast.
“We’re not going to go back to a 3% mortgage rate world, it’s unlikely we’re going to go back to a 4% mortgage rate world,” Jeff Tucker, chief economist at Windermere Real Estate in Seattle, told Yahoo Finance in a phone interview. “So instead, we’re going to be in a world of higher interest rates in the medium to long term.”
That’s because rising U.S. debt “will require higher debt yields to continue to finance it and essentially continue to lend to the government,” he said. “The most important consequence of higher public debt for the housing market is, first of all, higher borrowing costs in the medium and long term.
While the 10-year Treasury yield has recently hovered near 4%, more than one housing market watcher believes Treasury and mortgage rates may already be bottoming out.
The 10-year Treasury is a daily mortgage rate indicator. They usually move in unison, with a spread of two or more percentage points between them. For example, if the 10-year yield is 4%, mortgage rates are close to or slightly above 6%, where they are now.
At the Mortgage Bankers Association’s annual conference in Las Vegas on Monday, former Treasury Secretary Larry Summers predicted that the bond market will “hit a wall” in the coming years and bond yields will begin to climb much higher.
Summers said the 10-year Treasury yield could jump 75 basis points within weeks of the bond market’s move, with mortgage rates rising a full percentage point at the same time.
“I think that’s probably the most likely consequence of the path we’re on,” he added.
MBA Chief Economist Mike Fratantoni presented his latest economic forecast at the same meeting. He expected mortgage rates to rise by 2028. will remain at 6-6.5 percent at the end of
“As we move over the next couple of years, we think that’s more likely.” [long-term] Given the fiscal pressure on the economy, interest rates will go up, not down,” Fratantoni said.
The national debt is an issue that could affect the housing market and mortgage rates for decades.
An analysis by Yale’s Budget Lab reported that rising national debt would push the 10-year Treasury yield up to 2054. will increase by 1.4 percentage points. The traditional spread between Treasury yields and mortgage rates is around 2 percentage points, which could mean mortgage rates close to 7.5%.
The Bipartisan Policy Center, a nonprofit think tank, says the soaring national debt is “bad news for renters, homeowners and developers.”
“Debt-driven high interest rates can lead to inflation, which can cause developers to abandon their plans and contribute to the housing shortage. It also means families are left with fewer choices and higher mortgages,” the BPC said in a June report.
Windermere’s Tucker said the housing market will have to adjust to the new reality.
“No one should be buying a home with the expectation of a plan to refinance their interest rate by two points in a few years, because there’s really no guarantee that’s going to happen, and in fact it’s unlikely that it’s going to be available,” he said. “Mortgage borrowers should accept a world of higher interest rates.”
If you’re looking to buy a home, build your credit to earn the lowest home loan interest rate. Shopping around multiple mortgage lenders can also increase your mortgage rate by half a point or more, according to a new report from Realtor.com.
For homeowners with a lot of home equity, refinancing may not be the best option if you already have a low mortgage rate. But a home equity line of credit can allow you to reach that value — and HELOC rates have been falling lately.
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Laura Grace Tarpley edited this article.