The Effect of the Government Shutdown on Housing

The Federal government has now been effectively shut down for a little over two weeks.  Has anybody noticed?  Probably not yet unless you were planning a visit to a National Park; needed paperwork from a government office; had a loved one pass away and could not obtain funeral benefits for Veterans; work for the Federal government; or live in the DC area.

However, the government shutdown is starting to have an effect on the nascent housing market. It also is affecting interest rates (both positively and negatively) so we are seeing them stagnate a bit after an initial drop of about .5% in the first days of the shutdown.  I think that there are 5 key things related to the housing market as a result of the shutdown. They are as follows (in no particular order)

1. There are 800,000 federal workers without a paycheck for two weeks and counting.  As a result, these folks are not in a position to purchase a home at this time since they do not have either current employment or current income (which are, of course, both temporary and a technicality). But, more importantly, this could affect their ability to purchase a home in the future if this continues much longer since many of them are depleting their assets to pay household expenses.

2. On a related note, as a result of the furlough, many of the federal employees may have less money to spend during the all important Holiday season which begins in less than 6 weeks, possibly earlier, with Hanukkah starting on Thanksgiving!  These lower holiday sales will then cause additional economic pain for the stores that count on this season for their yearly profit and could result in additional unemployment.  All of the above will affect consumer confidence, and cause the economy to sputter to some extent. Such sputtering will definitely effect the housing market which will not be able to sustain its recovery when coupled with the 1% rise in interest rates which have already occurred this year!

3. With the shutdown, lenders are unable to verify the income information contained on people’s tax returns (i.e. IRS Form 1040). As of now, Fannie Mae and Freddie Mac are closing loans without this verification.  But, on some jumbo loans (which are not sold) and for many portfolio lenders (i.e. lenders who hold all their loans on their books) they are not.  This may cause a tightening of credit and reduction in the available loan programs.
4. Rural loans which are made by the US Department of Agriculture are not being made at this point.  Though this affects only a small part of the market and not much at all in the New York Metro areas, the inability of these borrowers in rural areas to obtain credit will affect their housing markets significantly. This again will affect consumer confidence and may ripple through the rest of the country.
5. Government reports such as the jobs report issued by the Bureau of Labor Statistics are not being released during the shutdown.  Though I find these reports generally to be a big yawn, since like the Jewish holidays which are never on time but always early or late, they tend to never be in amounts as the “experts” predicted. They are always either higher or lower which, depending on the predictions, then sends the markets soaring or dropping.  So, without these reports, the interest rate market is stagnant at this point with the benchmark 30 year fixed hovering around the 4.5% mark right now. But once the reports do get released, we could be in for a wild ride on interest rates depending on what they show!


So, that’s it for now.  In summary, the federal government shutdown has not yet been so bad for the housing market but it is starting to cause some issues.  New home sales other than in the never say “How high can it go” Manhattan market, are definitely starting to slow considerably. Some of this is the result of “the time of year” but most of it is not and is being caused by the indirect fall-out of the government shutdown.
Mostly, we need to end this to get our friends and family back to work for their sake as well as for the sake of the economy. But, what do I know? I’m just a mortgage guy and simple “dirt” lawyer!
For those of you in New Jersey, it is the special Senate election today so don’t forget to vote!

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