Mortgage rates have fallen after the government shutdown. The good news is lower costs for those who want to finance or refinance real estate. The bad news is that we may also see fewer homes sales and a stalled price recovery.
The national government closed its doors from September 30th through October 16th. More than 800,000 workers went without pay, but the impact was far-greater: Many services and businesses that rely on a functioning federal government slowed or closed. As one example, far from Washington at the Normandy American Cemetery and Memorial in France, visitors were turned away at the front gate.
Fewer people getting paychecks instantly translated into lower mortgage rates. On September 26th, a typical 30-year FHA loan was priced at 4.32 percent. By October 24th the same financing was priced at 4.13 percent, according to government figures.Part of the reason for lower rates was that market watchers had expected the Federal Reserve to reduce its $85 billion-a-month purchases of mortgage-backed securities and long-term securities in September. Instead, the Fed said it would keep on buying. Indeed, there is now the view that the Fed will have to continue its buying program at least until January when still-another budget confrontation could take place on Capitol Hill when the current deficit deal ends. Another view is that the Fed is stuck and has no way to stop buying long-term securities, a situation with no precedent.
Confidence and Consistency
Markets like consistency and confidence. People do not buy real estate if their paychecks are uncertain. Sure enough, existing home sales fell in September and the predictions for October suggest more cooling.
But the government shutdown and near-default on the federal deficit plainly impacted the real estate marketplace in other ways. As an example, an October 4th Q&A to FHA lenders from HUD offered this exchange:
Q: Will FHA still be able to endorse my loan if I am not able to obtain tax returns verified by the IRS during the shutdown?
A: FHA is aware that some lenders obtain tax transcripts directly from the IRS for use in underwriting their FHA-insured loans. These lenders may be unable to actually obtain any returns directly from the IRS for the duration of the Government shutdown.
Lenders may continue originating loans using FHA’s existing underwriting requirements, which have not changed as a result of the shutdown. Lenders are required to obtain tax returns from certain borrowers in order to originate FHA-insured loans and lenders must also continue to obtain the borrower’s signed authorization (i.e., Forms IRS 4506, IRS 8821, or whatever form or electronic retrieval service is appropriate) for any loan for which the borrower's tax returns are required.
Translation: Hey buddy, you're on your own if you make a loan and later verifications show errors in the mortgage application.
Another deficit stand-off is set for January 15th. Many people believe that the politics of the day will prevent another debt crisis but there are no guarantees. Meanwhile a housing market which has not returned to the pricing peaks reached in 2007 remains troubled and uncertain, hardly a prescription for booming real estate sales or a marked economic recovery.