How the Government Shutdown Could Impact Mortgage Rates and the Housing Market

The latest shutdown of the federal government has formally commenced, and it’s anyone’s guess how long it will last — and just how much it will impact the U.S. economy and housing market. Though early impacts are modest, economists caution that prolonged paralysis could disrupt financial markets, delay real estate transactions and inflate wobbles in mortgage rates.

A Minimal Short-Term Impact

The impact on homebuying and selling is typically mild in the first days of a shutdown. For now, mortgage rate rose only slightly: the average for a 30-year fixed-rate mortgages was 6.37 percent on October 1, up little from the previous week, according to Mortgage News Daily.

“The first-order effect of an average shutdown for the housing and financial markets will be pretty limited,” said Chen Zhao, head of economics research at Redfin. The larger worry, experts say, is if the shutdown continues.

What It Means for Mortgage Rates

Mortgage rates tend to respond to broader economic indicators. In the past, rates fall in shutdowns as investors fret about slowing economic activity — and then rebound once the government reopens.

But this time, there’s another threat: fears about U.S. credit quality. “Rates could also rise if investors become worried about the credit quality of U.S. debt,” said Melissa Cohn, a regional vice president at William Raveis Mortgage.

Complicating matters, crucial government reports — the jobs report due on Oct. 3 is circled in red by many Wall Streeters — are likely to be postponed. The Federal Reserve is set to meet October 28–29, and the absence of data could muddy monetary policy decisions that have implications for mortgage rates.

The Flood Insurance Roadblock

Among the more obvious is that enabling legislation (the reauthorization of the NFIP, for example), which is critical to home sales nationwide. The National Association of Realtors cautions there could be impact on around 1,360 real estate closings per day, or more than 41,000 transactions every month.

Without NFIP coverage, consumers in flood-prone areas cannot buy the policies they need; and NFIP policyholders are unable to renew. “Unable to obtain flood insurance, American families have no option but to turn to federal disaster aid, which is woefully insufficient,” NAR President Kevin Sears wrote in a letter sent Wednesday evening to congressional leaders.

Regional Impact: Washington, D.C. in Danger

The D.C. housing market is especially susceptible because of its heavy concentration of federal workers. Washington, D.C., had already been working its way through slower demand after earlier government measures such as budget tightening and return-to-office orders.

“A protracted government shutdown, or a shutdown that results in permanent cuts to the federal workforce, would slow housing market activity and lead to year-over-year declines in home sales and home prices,” said Lisa Sturtevant, chief economist at Bright MLS. The local market, while possibly rebounding over time, is fraught with risks in the near term.

For now, it’s “business as usual” in mortgage land, but the longer it goes on, the more we risk spiking rates, stalled transactions and soured buyer confidence. ColumnOne of the features of the partial government shutdown is that housing market stability depends on solvency.