A bipartisan budget deal slated for a Congressional vote Thursday would boost federal spending by nearly $300 billion, sending government debt soaring to nearly $1 trillion in 2018 and setting in motion a ripple effect that would ensure mortgage rate hikes, economists said.
If passed by Congress, the two-year budget deal would inject $20 billion into infrastructure programs while presumably hoisting the construction industry with temporary jobs in wild fire- and hurricane-ravaged areas of California, Texas and Florida through disaster relief funds.
But, among a wide range of provisions, the most detrimental to the housing market and the real estate industry at large, analysts say, is the rapidly rising deficit’s impact on the bond market.
Combined with a sweeping tax reform package passed in December projected to add more than $1 trillion to the deficit over the next decade, the budget deal, if signed into law by President Trump, would spur government borrowing to levels unseen since 2012, a move that could prompt the U.S. Treasury to issue an unprecedented flood of 10-year treasury bonds over the next few years.
“The Senate Budget deal—along with the Tax Reform package enacted in December—will both increase federal spending, meaning that Uncle Sam will need to borrow more money and will increasingly be competing with home buyers for long-term loans,” said Aaron Terrazas, principal economist at Zillow Group. “This is already putting upward pressure on mortgage rates at the same time the Fed is tightening monetary policy. Mortgage rates have defied expectations and remain at near historic lows, but the momentum is sharply upward now.”
The impact, economists warned, would not only be felt by homebuyers seeking mortgages. It would also lower home prices if buyers leave the market. After all, for every one percentage point increase in mortgages rates, buying power decreases by 10 percent, said Matthew Gardner, chief economist at Windermere, the Seattle-based real estate company.
On Thursday, the 30-year fixed-rate average rose to 4.32 percent, its highest level since December 2016.
“For every one percent up in interest rates, people are going to be able to afford to buy 10-percent less house,” Gardner told Inman News on Thursday. “It’s the classic 1-and-10 rule. What the direct corollary will be is the expectation that it will slow down house price growth.”
If passed on Thursday, the budget deal would narrowly avert a government shutdown scheduled for midnight, while also injecting $160 billion in defense spending over two years and $128 billion into domestic programs, including disaster relief and infrastructure funding.
At least one economist predicted those domestic spending initiatives would offer limited benefits to the real estate industry and housing market. Those would come in the form of temporary construction jobs and modest gains in housing inventory in parts of California, Texas and Florida.
“In terms of the infrastructure spending, whether that’s going to have some sort of impact on economic growth—there is a potential, of course —but economists believe that at this point in the cycle it’s maybe a little too late to extend growth for another year,” said Pacific Union Chief Economist Selma Hepp. “And, of course, it adds all this deficit that everyone’s so afraid of.”
As for a bipartisan plan to extend the Deferred Action for Childhood Arrivals (DACA) program ahead of a March 5 expiration, economists say the impact could be devastating for real estate-adjacent industries should hundreds of thousands of immigrants be forced to leave the country in droves.
On Thursday, House Speaker Paul Ryan joined Senate Majority Leader Mitch McConnell in promising to hold a vote on extending the program after the budget has passed.
“Depending on what happens with immigration reform, that’s really the one that may impact the housing market, whether it’s just people needing housing or it’s filling construction jobs,” added Hepp. “So that’s where we’re looking at some sort of potential impact.”
Email Jotham Sederstrom
