'Chaos': How the US Debt Default Will Rescue the Housing Market for Buyers and Sellers

The game lawmakers on both sides of the aisle seem to be playing with the nation's fast-approaching debt ceiling could have devastating effects on the housing market if a deal isn't reached—and soon.

The country may begin to run out of money needed to pay its debts as early as June 1, although there is no official date for doomsday.

Most economists and financial experts agree that there is the slimmest chance that the US will default. This has never happened before in the nation's history - and the results will be too catastrophic.

"There's too much reliance on it," says Realtor.com® Chief Economist Danielle Hale. "It will be very bad for the economy, and it will spill over into the housing market."

The impact of a default cannot be understated.

If rising mortgage rates hurt the housing market, a default would be like dropping a nuclear bomb on it. Mortgage interest rates will almost certainly rise, popular government-backed loans may disappear, and government assistance given to low-income renters may disappear. The pain will be shared between the housing buyers, the sellers, the housing owners and the renters.

In general, a default would jeopardize the country's financial reputation in the world, because the US would not pay its debts. It is likely that the stock market will clear. Government employees, contractors, Social Security recipients and countless others can stop receiving the checks they rely on. This could trigger a recession, and there is no doubt that unemployment will rise. And these are just a few examples of worst case scenarios.

"If they default, it will cause chaos in the entire world market, and it will be worse than the crisis of 2007-08," says Robert Fratti, a professor of finance at East Carolina University in Greenville, North Carolina.

If the federal government defaults, it's unclear who gets paid and who doesn't. About half a million jobs could be lost, according to the White House. If the conflict between Democrats and Republicans is not resolved quickly, about 8.3 million could be out of work as a result.

The longer the impasse continues, the more damage is done to the economy - and the real estate market. Housing prices may fall, sales will likely dry up and the housing shortage may worsen.

"I am confident that we will get the agreement on the budget, that America will not default," President Joe Biden said in a speech on Wednesday. "And it will be catastrophic for the American economy and the American people if we don't pay our bills."

The fallout in the housing market is a result of the US debt default

The fall in the housing market could be disastrous.

Interest rates will soar and mortgage rates are likely to follow, potentially reaching 8 percent, says Lawrence J. White, a professor of economics at New York University.

From there, it's a domino effect. Higher mortgage rates will price out many buyers. This lack of competition could cause apartment prices to fall even further. Potential sellers who went up for lower rates when they purchased their homes or refinanced their mortgages may be even more reluctant to list their homes. And the number of houses for sale may decrease even further, worsening the housing crisis.

Even if the impasse is short-lived, mortgage rates could remain high for longer than buyers and sellers are comfortable with.

"We are in uncharted territory," says White.

Buyers who need mortgages will not only struggle financially. Government-backed mortgages, such as the Federal Housing Administration and the U.S. Department of Veterans Affairs' loans, could suddenly become unavailable, Pratti warns.

Without these low-cost, down-payment loans, first-time home buyers can find it even more difficult to enter the market.

In the meantime, the housing vouchers and assistance given to low-income renters could be phased out, at least temporarily. Tenants may be evicted if their landlords don't get paid.

And while homeowners who rely on the federal government for their income or Social Security payments may fall behind on their mortgage payments, they are unlikely to lose their homes to foreclosure. It usually takes months for the bypass to pass, and a hypothetical political situation is unlikely to last.

But those who can't afford to pay their bills could see "lasting damage" to their credit ratings, according to Hale.

"It will be really ugly for the housing market," she says.

As talks between the White House and Republicans broke down on Friday, the stock market fell.

"Sometimes the game goes wrong, and you fall off the cliff," says White. "It always worries me."