If there the debt limit is not raised what will happen to U.S.
mortgages rates?

One estimate comes from the
Center for American Progress

. It tells us that “Mortgage interest rates will rise more than
U.S. Treasury rates. An increase in the 10-year Treasury rate by
half a percentage point–which is likely if the debt limit isn’t
raised–could translate into a jump in the mortgage rate equal to
0.66 percentage points, increasing mortgage rates by close to 14
percent from their current levels to their highest levels since
2008.”

According to the Center there’s more:

1. Once increased, mortgage loan rates are likely to remain
   high for some time.

   “Shocks to Treasury rates typically translate into mortgage rates
   rising and staying high. The housing market would consequently
   not get a reprieve once the federal government has to delay debt
   payments–even if the debt ceiling is eventually raised.”

2. New home sales would fall by as many as 32,000
   units.

   This is important given the huge fall-off in new home
   construction.

3. Existing home sales could fall by as many as 130,000
   units.

   This, too, is important given that we sell far fewer existing
   homes than we once did.

4. Home prices will fall.

   The reason? Fewer sales reflect less buyer demand, less buyer
   demand means fewer bids and less pressure to push up values in
   most markets.

Trends in mortgage rates

While the Center’s report looks toward the future, it might be
interesting to consider looking toward the past and the mortgages
that are now in place.

For a number of years the general direction of
mortgage rates

has been down. Rates, however, cannot stay down forever, there must
be some point where rates hit a floor and then begin to rise.

It’s difficult to know how low rates can go. For instance,
“T-bills got so popular that for brief periods between 1938 and
1941 they carried negative interest rates,” according to Forbes
magazine (See: “A Brief History of Stock Fads,” Sept. 14,
1992),

Right now, banks are able to borrow at zero percent interest.
Unless we’re going to venture into the negative rates seen during
the Depression, we just can’t go any lower.

Alternatively, mortgage quotes can go higher. A lot higher.

How about the 14 percent plus
mortgage rates

seen in 1984? If we see the return of such extreme mortgage quotes
now the country would be bankrupt.

The concern about the Center’s estimated mortgage rate increase
is not that they are wrong but that they are too conservative, that
in fact rates could go higher.

Mortgage rates to rise drastically?

The Center estimate is derived from a 0.50 percent increase in
Treasury bonds and then a somewhat larger rise in mortgage levels.
There is sense to this, as the Center explains, but what about
other factors?

For instance, if the U.S. government defaults on bonds owned by
foreign investors will those investors suddenly require not just
interest to hold our debt but also insurance?

Will the U.S. dollar continue as the reference currency for the
world?

Will we quickly face an unprecedented level of
inflation–something sure to drive up interest rates?

For those with fixed-rate mortgages the higher rates will be
someone else’s problem. But everyone will be impacted by slower
home sales, reduced property taxes that lead to fewer public
services and lower home prices. Everyone will pay more for
bread.

So is a mortgage-rate hike of 0.66 percent reasonable if the
government defaults on its loans? We should be so lucky.