Mortgage interest rates are edging up this week, despite inflation continuing to ease. This is just a reminder that inflation isn’t the only factor influencing mortgage interest rates, just the most significant.
Deeper dive: Why Inflation Matters
Interest Rates Also React to Politics
Institutional investors lend large amounts of money out by buying securities backed by some asset. The ones that matter for our purposes are those backed by the promise of the U.S. Government or by a pool of mortgage loans. As we know, investors need to earn a yield greater than inflation. Treasuries are a rare exception to this. Investors buy these essentially to “park” money somewhere in a very safe investment. They are safe because the U.S. always pays its debts.
Or does it?
There is a political battle going on right now in Washington D.C. over the debt ceiling limit. It’s not uncommon for the issue to be used as a political football, but we’ve never failed to raise it in time to pay our debts. Our leaders are currently engaged in a game of high-stakes chicken that just might prevent us from paying debts next week.
You might think, “So what? What happens if the U.S. can’t pay its debts?”
Certain Debts Won’t Get Paid
Without authorization to borrow more money, federal payments can’t go out. Like what?
- Payments on the national debt (treasury bills)
- Social security payments
- Medicare payments
- Medicaid payments
- Troops won’t be paid
- Veteran’s benefits will stop
- Federal civilian employees won’t be paid
- Food assistance programs will temporarily close
OK, it’s clear we’ll have some trouble, but how does that affect us?
Government Services Will Shut Down
You may not think of government services as being essential. You rely on far more services than you think, however. Your weather reports? Based on NOAA data. Crime fighting of federal crimes? The FBI, the DEA, ATF, Homeland Security and others. Drug cartels and terrorists will have a nice little window of opportunity. If Border Patrol agents are being paid? What do you think would happen?
This is only a small sampling of the agencies that would either shut or be staffed by workers who weren’t being paid to be there.
What Happens to Treasury Interest Rates if We Fail?
Treasury yields, however, are an even bigger deal. Investors all over the world look to U.S. Treasury Bonds as being the gold standard in safe investments. If we don’t pay the bills that changes. Demand for Treasury Bills drops, and in order to raise enough money to fund the government in the future, the market will demand higher interest rates for the bonds.
Of the many negative consequences, one super important one is the interest payments on the national debt. Currently it is in the hundreds of billions of dollars per year. We are now paying close to $200 Billion per quarter – $800 Billion per year – in interest, about the same cost as the defense budget. If interest rates double (that’s possible) our cost of servicing the debt would rise dramatically, squeezing out other necessary programs.
What Happens to Mortgage Interest Rates if We Fail?
We have no idea – we’ve never been here before. Retail mortgage rates have traditionally run 2.5% to 3% above the 10-year treasury rate. If that margin holds and the 10-Year T-Bill goes to, say 6% (not at all impossible) we’re looking at 30-year fixed rate mortgages at 8.5% to 9%. That’s if you are very well-qualified and have 20% to put down as a down payment.
How Could We Avoid Default if No Agreement is Reached?
It’s not clear what could be done if Congress and the Administration don’t reach an agreement. There are some options being floated, including the administration invoking the 14th amendment, which states that we will always pay our debts, or minting a $1 Trillion coin and depositing it in the treasury. Both solutions would spur lawsuits. Lawsuits would tie things up in litigation. Uncertainty would push mortgage interest rates up.
What Can We do About It?
Not much to be honest. Call or write your congressman, make some noise. If you think you are in the market to buy a home, this week would be a very good week to go into contract and lock your interest rate.
Casey Fleming, Mortgage Advisor and Author of The Loan Guide (2014) and Buying and Financing Your New Home (2023)
About Casey Fleming: Casey Fleming is a veteran mortgage advisor (NMLS 344375) and Author of The Loan Guide and Buying and Financing Your New Home writes extensively about real estate finance, the real estate market, and the relationship between economics and finance. He advises clients throughout California, and is based in the heart of Silicon Valley. He writes articles regularly for several online publications, is a subject-matter expert for two prominent finance-related sites, and is regularly quoted in articles for many other publications.
This article represents the opinions of Casey Fleming, and not necessarily those of any company or organization cited or mentioned in this web site. This analysis was prepared with the best information available at the time it was written. We do not have any magical insider information about bond markets, real estate markets or mortgage markets that would make economic projections any more reliable than any other source. No warranty is made that the outcome will reflect the projections in this article, and neither the author nor LoanGuide.com are responsible for decisions that you make regarding your choices about your real estate or mortgage or those of your clients.
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