A potential U.S. debt default would have a devastating impact on the housing market. Mortgage rates could skyrocket, making it extremely difficult for many potential buyers to afford homes. The affordability challenges already faced by homebuyers would worsen significantly.

The U.S. has never experienced a debt default in its history. While we do not expect a default to happen, and predict an agreement to be reached, there is still much speculation of the possible impacts on the economy, and on the real estate market.

What would the ramifications be if an agreement is not reached by the U.S. government on its debt?

The consequences would be far-reaching. Higher mortgage rates as high as 8% from today’s average 6% could ensue. Higher rates would reduce competition among buyers and could lead to a decline in home prices. Increased interest rates could put homes out of reach for hundreds of thousands of buyers, according to NPR’s Chief Economic Correspondent, Scott Horsley.

Homeowners who had secured lower rates might be reluctant to sell, exacerbating the shortage of available homes. This imbalance between supply and demand would worsen the housing shortage problem. Higher interest rates would put homes out of reach for hundreds of thousands of buyers.

If the U.S. government, long thought to be the world’s safest borrower, proves to be less than reliable, lenders might insist on charging permanently higher rates for everyone.

Higher interest rates would put homes out of reach for hundreds of thousands of buyers. If the U.S. government, long thought to be the world’s safest borrower, proves to be less than reliable, lenders might insist on charging permanently higher rates for everyone.

Even if the default were resolved quickly, the effects would persist. Mortgage rates could remain high for an extended period, creating further uncertainty in the market.

Housing Market Devastation: The Consequences of a U.S. Debt Default

The impact would extend beyond potential homebuyers. Government-backed loans, such as FHA and VA loans, might become unavailable, making it harder for first-time buyers to enter the market. Low-income renters relying on housing vouchers and government assistance could face difficulties, as these programs might temporarily disappear. There is a risk of eviction if landlords don’t receive rental payments due to the default. The absence of low and no downpayment loans could further hinder first-time homebuyers’ access to the market, making it increasingly challenging for them to enter.

While immediate foreclosures are unlikely, individuals depending on government income or Social Security payments might struggle to maintain mortgage payments, leading to lasting damage to credit scores.

The situation is serious, and the consequences for the housing market and the overall economy would be severe. The stability and reliability of the U.S. government’s borrowing power are essential to prevent long-term harm to the housing market and financial hardships for people nationwide.

There’s too much riding on it … It would be very bad for the economy, and that would spill over into the housing market.

While chaos would temporarily ensue following a debt default, most experts agree this is unlikely to happen. This has never before happened in U.S. history, and the ensuing results could be catastrophic. Chief Economist for Realtor.com, Danielle Hale, agrees. “There’s too much riding on it [default]. It would be very bad for the economy, and that would spill over into the housing market.