Three and a half years after the start of the Great Recession and two years after it officially ended, Americans are still worried about the anemic economy. The unemployment rate is stubbornly high at 9.1% and first-quarter GDP growth was a weak 1.8%. There’s been a lot of talk in the media about the risk of a “double-dip” recession and about raising the debt-ceiling. But all of this stuff is dense and sometimes difficult to untangle, so I’ll try to explain the debt limit in layman’s terms (similar to what The Atlantic did here) and how it might affect the housing market:
What is a debt ceiling?
Congress limits the total amount of debt that the federal government can carry, and it periodically increases this amount as the government comes close to reaching it. Currently, Congress allows for $14.3 trillion dollars in debt, but the United States is coming perilously close to reaching this level; Treasury Secretary Tim Geithner says that if the debt ceiling is not raised by August 2, the US will be unable to pay its bills.
What happens if the debt ceiling isn’t raised?
If the debt limit is not increased by Secretary Geithner’s deadline of August 2, the US will enter default. Right now, spending exceeds tax revenue, so the government must borrow (by selling bonds) to cover the difference. When the debt ceiling is reached, the government will not be able to borrow anymore, and the US will be unable to fulfill its obligations. Social Security checks may not be issued or government offices may be shut down. Once the debt ceiling is increased, the government will resume paying its bill and almost certainly pay its obligations retroactively. The scary part, though, is that no one really knows what will happen – the debt ceiling has never been reached in this country, and most other countries don’t even have such a thing.
What will the consequences be?
Again, no one knows exactly what will happen, but it seems unavoidable that interest rates will jump. Moody’s, a leading credit rating firm, has threatened that it will downgrade the perfect AAA rating for American government bonds if a compromise on the debt ceiling isn’t reached imminently. A downgrade means that Moody’s no longer thinks of U.S. debt as risk-free, and that there is a chance that bond-holders will lose their investment. As a result, investors will demand a higher interest rate on government bonds to make up for the increase in perceived risk.
How does this affect me?
You might be wondering how exactly you’ll be affected by this whole mess. Well, even if you aren’t a government employee and don’t receive Social Security, you could still see some effects. The most important is the increase in interest rates; the interest rate that you get on a home loan, for instance, is directly affected by the interest rate on government bonds, so if August 2 comes around without a debt ceiling increase and interest rates go up, people will be less likely to buy things that require financing, like homes, because it will just be too expensive. The housing market has yet to recover from the beating it took in the Great Recession, so this is not good news. As CNN’s Jack Cafferty notes here, the homeownership rate in the US has fallen to just 66.4%, its lowest level since 1998. If interest rates rise, fewer people will be able to afford this important part of the American Dream.
Is there a silver lining?
Yes. As a result of declining home-ownership, demand for rental properties will increase. And the multifamily industry has seen impressively growth recently, with impressive new projects breaking ground every day. It may become more expensive for multifamily housing owners to get financing for new projects, but companies with good credit should be able to escape the worst of it.
So what do you think? Will Congress reach a compromise to increase the debt ceiling before the August 2 deadline? And how do you think it will affect you? Let us know here or on our Facebook page! Stay up to date on this issue and other similar ones as part of our ‘Rent Increase WATCH Series’.