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Government Shutdown May Derail Housing Recovery

As we enter into the tenth day of a federal government shutdown, we are starting to see just how people are impacted. One area of the government shutdown that is directly affecting people are homebuyers. There are three government agencies that back mortgages for homebuyers - the Federal Housing Administration (FHA), U.S. Department of Veterans Affairs, and the U.S. Department of Agriculture.

Long Term Shutdown Will Impact Housing

The Federal Housing Administration's fulltime staff during the shutdown is only one tenth of its normal size, which means there will be delays approving loans. The FHA and the U.S. Department of Veterans Affairs account for about one in four new mortgages.

Freddie Mac and Fannie Mae, which currently back a majority of new home loans made aren't impacted by the shutdown since they are funded by their operations and not Congress.

The  U.S. Department of Agriculture backs mortgages in rural areas isn't even taking on any new business during the shutdown. The U.S. Department of Agriculture has canceled loan closings during the shutdown.

Low Mortgage Rates Helped Turn the Tide in Housing

The housing market is still fragile, recovering from the worst housing bust since the Great Depression in the 1930's. Affordable home prices and low mortgage rates have finally helped turn the tide in the housing market. The FHA's program help first time home buyers, allowing them to make a down payment as low as 3.5 percent of a home's purchase price whereas most lenders require a 20 percent down payment.

The longer the government is shut down, the more likely the economy will take a hit and as a result the housing market will also take a hit. The pending debt ceiling could throw the economy and housing markets into full blown depressions. The latter is a very unsettling scenario but overall, highly unlikely because cooler heads will eventually prevail in Washington D.C. and a deal will be made.

The full economic impact of the government shutdown won't be known for months to come, but make no mistake - the shutdown will subtract from GDP growth. The shutdown and uncertainly has already sent short term U.S. Treasury yields much higher.

Short Term Interest Rates Sharply Higher

The shutdown and possible default have sent 1 month U.S. Treasury rates sharply higher, as they have almost tripled in a week. On October 1, 1 month Treasury rates were at 0.10 percent and 1 month rates closed yesterday at 0.27 percent. The biggest increase came this week. On Monday rates were at 0.13 percent and yesterday rates more than doubled at 0.27 percent.

Thankfully, at this point only the shortest term Treasury rates have been affected. Thanks to the pending crisis, the yield curve is inverted. 1 month rates are at 0.27 percent while 3 month rates are much lower, closing yesterday at 0.05 percent. The reason that only 1 month rates are so much higher is because the markets are nervous about the potential for default in the short term.

Mortgage Rates Remain Stable

During the shutdown, both short term and long term mortgage rates have remained near current levels. Average 30 year conforming mortgage rates are currently at 4.27 percent, which is actually lower than last week's average rate of 4.32 percent. 5 year conforming adjustable mortgage rates are slightly higher this week at 3.51 percent, an increase from last week's rate of 3.44 percent.

As long as mortgage rates don't take a sharp upturn and economic growth continues, the housing market will be okay. A prolonged shutdown, eroding consumer confidence and causing an economic contraction will derail the housing recovery. Let's hope Republicans and Democrats can find a meaningful resolution very soon.
Author: Brian McKay
October 10th, 2013