Debt Drama Could Be Another Blow To Housing

Jul 20, 2011
Originally published on July 21, 2011 9:12 pm

Members of Congress appear closer to reaching a deal in the ongoing drama over raising the nation's debt ceiling. The economic stakes are high, and top investors and executives at major companies have been putting increasing pressure on lawmakers to strike a deal.

Take the housing market for example: Industry insiders there worry that if the political theatrics continue much longer, that could spook investors, drive up interest rates, push down home prices and hurt the economy.

Right now, interest rates are low, and that means the government can borrow money cheaply to finance its huge debt load. Likewise, many home buyers can get low mortgage rates, which is a rare bright spot for the beaten down housing market.

"Rates are unbelievable, they've been unbelievable for a while," says Patrick Fortin, who runs Century 21 Commonwealth in Boston. "It's a huge factor, it's kept the market from being in much worse shape."

Fortin, who has 500 real estate agents and 18 offices around the city, has been watching the ongoing political fight over the debt ceiling. He thinks it's hurting the housing market and other industries because lawmakers are making many Americans nervous about the economy.

"I'd like to see them get it done and work it out and move on," he says. "You know, whether you're selling cars or hamburgers or houses, when people are concerned that we could have major economic issues, it impacts everything. Buyers don't want to buy if they think there's bigger issues out there."

Many economists agree that consumer confidence is taking a hit from all this. Their other big concern is that investors have been starting to get nervous, too. And it's possible that that could end up driving interest rates higher, which would not be good at all for Fortin's mortgage business.

"Oh, there's no question, any sort of bump is an impact, a substantive bump would be dramatic," he says.

Losing Faith

Here's how this would work: If the debt ceiling isn't raised, the U.S. Treasury could default on its debts. The Treasury says it would run out of the money it needs to make payments on some of its Treasury bonds.

"Treasuries are essentially the holy of all holy credits," says Scott Simon, one of the top bond investors at Pimco, which manages more than $1 trillion on behalf of pension funds and other customers. He says financial markets are based on trust, and investors around the world have tremendous faith in U.S. Treasury bonds.

"If the U.S. defaults, or appears like it's going to default intentionally, I think that puts huge questions into the credibility, the sanctity, the holiness of U.S. Treasuries," he says.

And that means investors could demand higher interest rates to loan the U.S. government money. But it could also drive up interest rates for all kinds of things, including home loans.

Simon explains that U.S. lawmakers even just flirting with default, as they have been, have already raised some scary questions in the investing world. If Treasuries are no longer sacred, what about home loans that are guaranteed by the government-backed mortgage firms Fannie Mae and Freddie Mac? What if the U.S. someday doesn't honor those guarantees?

International investors have started to shy away from Fannie and Freddie mortgages, in spite of the explicit support of the U.S. government.

Increasing The Pressure

There's talk of ratings agencies downgrading Fannie and Freddie. If more investors lose faith, Simon believes that would push interest rates way up and severely restrict millions of Americans' ability to qualify for loans.

"That is our worry: We think housing is fragile, it's very easy to break and very difficult to fix if you break it," Simon says. "My biggest personal fear is that the Congress, in trying to get a good headline, accidentally breaks the housing market and you want to avoid that desperately."

Simon says another crash in housing could bring the banking system with it. An actual default on Treasury bonds could be even worse.

This is why many top business people are putting pressure on politicians to basically stop the madness and raise the debt ceiling. Many think lawmakers are playing a dangerous game that could push up interest rates. And if that happens:

"It's going to have a staggering impact on the economy," says Richard Smith, the CEO of Realogy Corp., which owns Century 21 and Coldwell Banker. He says he's on the phone every day to his lobbyists in Washington who are pushing lawmakers to reach a deal. He says many other CEOs are too.

"Running up to the last minute is just completely irresponsible on the part of the government. This is inexcusable," he says. "To take the entire business community to the edge. What do you think is going to happen for the past several months? Nothing. People are not investing, not making major business decisions, they're not hiring — they're holding their cards."

So investors and CEOs are hoping Congress pushes a deal through quickly.

Copyright 2018 NPR. To see more, visit http://www.npr.org/.

ROBERT SIEGEL, Host:

As NPR's Chris Arnold reports, the economic stakes are high, especially for the housing market.

CHRIS ARNOLD: Right now, interest rates are low, and that means that the government can borrow money cheaply to finance its huge debt load. Likewise, many homebuyers can get low mortgage rates, and that's been a rare bright spot for the beaten down housing market.

PATRICK FORTIN: Rates are unbelievable. I think its one thing that's kept the market really from being in much worse shape.

ARNOLD: A really nice yard.

FORTIN: Yeah. And you could have a swing set and still have room for a patio barbecue.

ARNOLD: Hockey rink. Now everyone in Boston is building hockey rinks...

(SOUNDBITE OF LAUGHTER)

ARNOLD: Fortin has been watching the ongoing political fight over the debt ceiling, and he thinks it's hurting the housing market and other industries already because he thinks lawmakers are making Americans nervous about the economy.

FORTIN: I'd like to see them get it done and work it out and move on. You know, that whether you're selling cars or hamburgers or houses, when people are concerned that we could have, you know, major economic issues, it impacts everything. Buyers don't want to buy if they think there's bigger issues out there.

ARNOLD: Many economists agree that consumer confidence is taking a hit from all this. Their other big concern is that investors have been starting to get nervous too. And it's possible that that could end up driving interest rates higher, which would not be good at all for Fortin's mortgage business.

FORTIN: Oh, there's no question. You know, any sort of bump is an impact; a substantive bump would be dramatic.

ARNOLD: OK. So here's how this would work. If the debt ceiling isn't raised, the U.S. Treasury could default on its debts. Treasury says it would run out of the money that it needs to make payments on some of its treasury bonds.

SCOTT SIMON: Treasuries are essentially the holy of all holy credits.

ARNOLD: Scott Simon is one of the top bond investors at PIMCO, which manages more than a trillion dollars on behalf of pension funds and other customers. He says financial markets are based on trust. And investors around the world have tremendous faith in U.S. Treasury bonds. So...

SIMON: If the U.S. defaults or appears like it's going to default intentionally, I think that puts huge questions into the credibility, the sanctity, the holiness of U.S. treasuries.

ARNOLD: Simon explains that U.S. lawmakers even just flirting with defaults, as they've been doing, that's already raising some scary questions in the investing world. If treasuries might not be sacred, well, then what about home loans that are guaranteed by the government-backed mortgage firms Fannie Mae and Freddie Mac? Those are probably less sacred. And what if the U.S. someday doesn't honor those guarantees?

SIMON: There is a worry, and you see it in the patterns of international investors that they've started to shy away from Fannie and Freddie mortgages in spite of the explicit support of the government.

ARNOLD: If more investors lose faith, Simon believes that that would push interest rates way up and severely restrict millions of Americans' ability to qualify for loans.

SIMON: We think housing is fragile, very, very easy to break and very, very difficult to fix it if you break it. And, you know, I think my biggest personal fear is that the Congress, in trying to get a good headline, accidentally breaks the housing market, and you want to avoid that desperately.

ARNOLD: Simon thinks another crash in housing could bring the whole banking system down with it. An actual default on treasury bonds could be even worse. And this is why many top business people are putting pressure on politicians to basically stop the madness and raise the debt ceiling. Many think lawmakers are playing a dangerous game that could push up interest rates. And if that happens...

RICHARD SMITH: It's going to have a staggering impact on the economy.

ARNOLD: Richard Smith is the CEO of Realogy Corporation, which owns Century 21 and Coldwell Banker and other firms. He says he's on the phone every day to his lobbyists in Washington who are pushing lawmakers to reach a deal. He says many other CEOs are doing the same.

SMITH: Running up to the very last minute is just completely irresponsible on the part of the government. To take the entire business community to the edge, what do you think is going to happen? Nothing. People are not investing. They're not making major business decisions. They're not hiring. They're holding their cards.

ARNOLD: Chris Arnold, NPR News, Boston. Transcript provided by NPR, Copyright NPR.