The federal government has halted most operations for the first time in nearly seven years, a move that will have ripple effects through the financial markets that determine mortgage rates.
The government shutdown began at 12:01 a.m. on Wednesday, after Republicans and Democrats in Congress failed to reach a deal on a new spending bill to fund federal operations.
At Wall Street's opening bell, the major stock indexes opened slightly lower, all losing less than 1%, while long-term bond markets saw a moderate decline in yields, easing recent upward pressure on mortgage rates.
During a government shutdown, hundreds of thousands of federal workers are placed on unpaid furloughs, which can slow economic growth. Typically, the effect is temporary and most of that lost growth is regained when the shutdown ends and furloughed workers receive retroactive pay.
However, this shutdown comes at a time of heightened economic uncertainty, with recent federal reports sending mixed messages suggesting that overall growth appears strong while the labor market seems to weaken.
The Federal Reserve's next decision on interest rates later this month hinges on how those trends play out. But during the shutdown, the government will cease issuing crucial reports on inflation and the economy, including the highly anticipated monthly jobs report that had been due on Friday.
That leaves Fed policymakers, and the investors who ultimately determine mortgage rates, groping in the dark as they try to assess economic conditions, introducing new uncertainty and volatility into the market.
"The loss of federal labor and inflation reports comes at a critical time in the monetary policy cycle," says Realtor.com® Chief Economist Danielle Hale. "The Fed recently recalibrated its policy rate for the first time in nine months and may or may not continue to do so depending on what the incoming data suggest is appropriate."
Markets will instead rely heavily on private-sector economic data, such as Wednesday morning's ADP employment report that showed a surprise decline of 32,000 in private payrolls in September—the biggest monthly decline in more than two years and a troubling sign for workers.
That news sent 10-year Treasury yields to their lowest level in two weeks, as investors gauged the Fed as being extremely likely to cut rates again later this month. Mortgage rates typically follow the 10-year yield, meaning the move reversed recent upward pressure on rates.
However, the longer the government shutdown persists, putting a blackout on gold-standard federal economic data, the greater the risk that market expectation will stray from reality, and sharply correct when reporting resumes.
"Markets and investors will continue to make decisions with the best information available, but when the information bottleneck finally clears and the government issues reports again, we may see a bigger adjustment in interest rates, including mortgage rates," says Hale.
Hale predicts that mortgage rates will remain steady or rise slightly during the shutdown, and then resume easing once the disruption resolves and federal economic data resumes.
"In the meanwhile, home shoppers can rate-test their budget by using mortgage calculators to determine how swings in mortgage rates will affect their housing payments," she says.
Last week, average rates for 30-year mortgages ticked higher to 6.3%, up from an 11-month low of 6.26% the prior week, according to Freddie Mac.
How the shutdown affects the housing market
Most homebuyers won't be directly affected by the government shutdown, which isn't expected to significantly affect the processing and approval of traditional mortgages.
However, the shutdown will disrupt small but important elements of the housing market, and a lengthy shutdown could generate significant uncertainty, weighing on home sales.
Perhaps the most significant impact on homebuyers is a lapse in authorization for the National Flood Insurance Program (NFIP), which provides more than 90% of flood insurance policies sold across the country.
Although existing policies remain in force and the program will continue to pay claims, the NFIP cannot write new policies until a new spending bill is passed.
Mortgage lenders typically require flood insurance for homes that are located in areas at risk of flooding, and the suspension of NFIP underwriting will leave thousands of homebuyers scrambling for alternative coverage, or unable to close.
The National Association of Realtors® estimates that the pause in new NFIP policies will delay or disrupt some 1,400 home transactions each day, and many buyers in high-risk areas without flood insurance coverage.
“Each day that passes during the shutdown, potential real-life impacts will be felt in America’s housing market, which accounts for nearly 20% of the U.S. economy," says NAR Chief Advocacy Officer Shannon McGahn.
Meanwhile, the hundreds of thousands of federal workers who are furloughed or working without pay may struggle to pay rent or make mortgage payments.
"If the shutdown lasts for weeks, the resulting financial strain could weaken home sales, particularly in metros with a higher share of federal workers," says Realtor.com senior economist Anthony Smith. "Over time, this could even contribute to softening home prices in these markets."
A recent Realtor.com analysis identified markets with a significant share of residents employed by the federal government, including Washington, DC (11%), Virginia Beach, VA (7%), Oklahoma City (4.2%), Baltimore (3.7%), San Diego (3.1%), and San Antonio, TX (3%).
Overall, uncertainty from the shutdown threatens to derail an early fall bounce in the housing market, afer falling mortgage rates finally boosted activity following a historically weak spring and summer.
"A government shutdown adds uncertainty into a housing market that is already under pressure from high home prices and elevated mortgage rates," says Smith. "Anything that further discourages prospective buyers from entering the market and risks slowing sales even more in a slow housing market is not helpful."
Read more at Realtor.com
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