Mortgage Rates Could Rise to 8.4% if U.S. Defaults on Debt

If you thought the arguments in Washington about raising the U.S. debt ceiling would not have an impact on personal finances, you may need to think again if you are a homeowner or would-be homeowner.

An analysis by Zillow projects that if the U.S. winds up defaulting on its debt, mortgage rates could rise to 8.4%, “sending the mortgage payment on a typical home 22% higher by September….That would be on top of an 82% rise over the past two years.”

And if that were to happen, it would not only discourage home buyers – especially first timers – but sellers as well, who might decide to stay put rather than moving on up. The higher rates “could send the market into a deep freeze,” Zillow senior economist Jeff Tucker commented. “It would wipe nearly one-quarter of projected sales off the board in some months.”

The reason the debt ceiling debate matters for the residential market is because of its ties to mortgage rates, Zillow explained. “Shaken confidence in Treasury bills being repaid means investors would require a greater return before purchasing them. Mortgage rates tend to follow Treasury rates and would be expected to rise as a result.”

Zillow notes that a national debt default, though possible, is unlikely, given past history. If it does happen, however, home values would begin to fall in August, but only by 1% through February 2024. “The thin silver lining is that Zillow economists don’t expect home values would lose much ground, even with a default” because of the low inventory of houses on the market.

“It is critically important to find a solution [to the debt ceiling debate] and not put more strain on Americans who are striving to achieve their homeownership dreams,” Zillow stated.