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Home | News | Foreclosure | Debt Ceiling Threatens ‘Economic Pain’ and High Foreclosure Rates
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Debt Ceiling Threatens ‘Economic Pain’ and High Foreclosure Rates

The U.S. housing market could experience a severe double-dip contraction marked by lower home sales and depressed house prices if Congress fails to raise the federal debt ceiling, according to a statement from the ""Center for American Progress"":http://www.americanprogress.org, a nonprofit research and educational institute that focuses on government policy.

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The Center cites the House majority for toying with the idea of not raising the ceiling, which is the maximum amount the federal government can borrow without additional congressional action.

Not doing so, the Center explains, would ""spark a return of the economic pain of the past few years for many families as foreclosures would remain at or near record highs.""

James Frischling, president and co-founder at ""NewOak Capital"":http://www.newoakcapital.com, a New York-based financial advisory firm, contends that not raising the limit by early August threatens to put the U.S. itself on the verge of default.

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""Last week ended with the U.S. hitting its debt ceiling of $14.28 trillion and concerns of ‘catastrophic economic consequences,' according to Treasury Secretary Geithner, if the U.S. doesn't raise the debt limit,"" said Frischling.

""The drama is in place, and it's a safe bet that the negotiations between Democrats and Republicans will go until the last possible moment before a compromise on reducing government spending and an increase in the debt ceiling is reached,"" Frischling added.

According to the Center for American Progress, there is a clear connection between the debt ceiling and the housing market that starts with the rate of interest paid on U.S. Treasury bonds and home mortgage rates.

Failing to raise the federal debt ceiling would cause interest rates to climb, including mortgage rates, alongside interest rates on U.S. Treasury bonds, making homes less affordable and depressing house sales and prices, the Center argues.

The Center describes a trickle-down effect that could ensue if Congress fails to raise the ceiling.

Because shocks to Treasury rates typically translate into mortgage rates rising and staying high, mortgage rates could remain high for an extended period. New home sales would drop to record lows, and existing home sales would decrease, the organization warns.

The drop in existing home sales would then contribute to lower prices. Lower house prices would put more mortgages ""underwater,"" lowering the incentives for homeowners to remain current. This in turn, the Center says, could keep mortgage delinquencies and foreclosures near record highs for an even longer stretch.

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