Placing my feelings about the economic ineptitude of Congress and the power S&P has over the US economy despite being a key enabler of our current economic conditions aside, the S&P downgrade certainly won’t help the US housing market, a critical pillar of future economic recovery. Today’s Fannie Mae and Freddie Mac S&P downgrade was not unexpected since they are wholly dependent on the US government.
Here are a few thoughts about the unfolding situation as it relates to housing.
Mortgage rates - They will likely edge higher and fixed rates may dominate adjustable rates. Global understanding of risk has been thrown out the window after 70 years of the US sitting with a AAA rating. Interest rates (and mortgage rates) are a measurement of risk. The US, at least in eyes of S&P, is now riskier with a AA+ rating rather than the virtually risk free AAA rating. I keep wondering what nation on the planet will deserve a AAA rating if the US doesn’t? However, mortgage rates were already anticipated to rise over the year. If Moody’s and Fitch, the two other rating agencies in the oligarchy don’t eventually agree with S&P, the economic impact may be more muted. Betting money says they will eventually be more in line with S&P.
Sales activity - Consumers do not like uncertainty. With more information to process and higher borrowing costs, consumers will likely take longer to make a decision. Although fewer consumers will qualify for a mortgage with higher rates rising from historic lows, that isn’t expected to be they key factor in the anticipated slow down in sales. Potential purchasers who were on the fence may opt to postpone until things become more clear in the coming weeks and months.
Sales prices - A slow down in sales activity may cause active inventory to edge higher and price trends to weaken (this is a macro view versus a local view since all markets are different).
The economy, jobs — Of course the key driver of the economy and housing demand is employment and income. With unemployment stuck in the low 9% range and population growth outpacing job growth, higher borrowing costs for businesses will work against more hiring.
This is only my initial stream of consciousness on this situation. We’ll watch the situation closely and report as this plays out over the coming weeks and months.
One of the view points I have formulated over the past few months has been the idea that low mortgage rates are actually keeping credit tight and rising rates might actually help housing. More on this in a future post.
All in all, the ratings downgrade not a good thing for the economy, jobs and housing, but its not all bad. Economic policy over the past several years coming from inside the Beltway has actually worked against a housing market recovery. In reality, this downgrade should have happened a while ago and perhaps it will force the US government to get its economic act together instead of kicking the can down the road.