For those of you who have been following the news taking place in Washington DC to raise the Debt Ceiling you have seen a slow. laborious process that seems to be stuck. No matter your opinion of what the final product should look like, a failure to raise the Debt Ceiling places the U.S. economy on very rocky ground.
As background let me explain that all governments in the U.S., be they City, State or Federal, rely on debt to get them through some portion of their tax year. Taxes come in at different times and at different rates throughout the year but the bills to run the government come in on a regular basis. When the amount of tax revenue doesn’t match the bills, all entities rely on borrowing to get them to the next tax cycle. Think of them as a form of Payday loans. At the Federal level limits are set by Congress on how much debt can be outstanding at any given time. It is expected that on or about August 3rd the Federal government will hit that limit and if that happens then bills won’t get paid. I have heard from different sources that among some of the bills that won’t get paid are Social Security or Medicare. I don’t know if this is true, but imagine how your creditors would view your failure to pay your bills and multiply that at the Federal level and you can get an idea of the magnitude should this happen.
Speaking specifically about the impact of a Federal default on the real estate industry. In speaking to an experienced lender yesterday who watched this type of default play out in the 1990’s, he explained that when the Feds default on their debt interest rates rise on all types of loans. Once the rates rise it is some time before they return to previous low levels, sometimes they never return. A rise in interest rates could push many buyers out of the home buying process which is not good for either buyers or sellers. I would encourage everyone to take an active role in this debate and contact your Congressional representatives and urge them to find a compromise to this issue so that the American economy doesn’t get derailed again.