As lawmakers struggle to reach a debt ceiling agreement, Treasury Secretary Janet Yellen warns of potential economic “calamity.” Zillow’s senior economist Jeff Tucker suggests that if the U.S. defaults on its debts, possibly by June 1, mortgage rates could soar to 8.4% by September. This would increase mortgage payments for new borrowers by over 20%, further straining affordability already impacted by last year’s jump from 3% to 6% mortgage rates and a 41% surge in home prices during the pandemic.

Housing Market Headed for a ‘Deep Freeze’ if US Defaults

Although Tucker acknowledges a U.S. default is “unlikely,” such a scenario would send the housing market into a “deep freeze.” For example, on a $600,000 home with a 20% down payment, monthly mortgage payments would rise from $2,878 at 6% to $3,522 at 8%, pricing many buyers out of the market.

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Existing Home Sales Could Plummet 23% Later This Year

Zillow estimates that in the event of a debt default, existing home sales could plummet 23% later this year, and home values may be 5% lower by the end of 2024 compared to a no-default scenario. A mortgage rate increase to 8% would cause existing home sales to drop from 4.3 million in April to 3.3 million in September, further destabilizing the recovering housing market.

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