Timing is everything, and in this case, it’s bad. The effects of the government shutdown are making troubling waves across all aspects of the economy. For the housing market, only newly recovered and still finding its feet, this roadblock is just one more problem we just don’t need.
Mortgage rates had been climbing, but October started with a solid dip from 4.5% down to 4.32%. In most cases homebuyers would be jumping to take advantage of the lower rates, but not this time. The uncertainty over the economy caused by the shutdown is holding up home sales. As David Hall, President of Shore Mortgage, said, “This shutdown does come at an especially bad time as new home sales and home construction are building back up. More uncertainty is not what we need.”
Mortgage rates are linked to the economy. If the economy slows, as in the case of a prolonged government shutdown, rates will get lower. The current rate dip is far from dramatic, however, and rate reductions are generally a business tactic to attract borrowers. So this dip in rates may simply be because of the shutdown as an attempt to lure out wary homebuyers.
Two aspects of home buying that are directly affected by the government shutdown are FHA loans and IRS records. Both of these government agencies are locked up in the shutdown, making mortgages harder to get and slower to process at the moment. The FHA must provide lenders with a case number prior to the appraisal of a home for a FHA home loan. Until the shutdown ends, new FHA loans are not happening, and many in process FHA loans could be stalled. Once the shutdown is ended, further delays can be expected until the downtime backlog is cleared.
The U.S. Department Housing and Urban Development, which runs the FHA, is maintaining “essential services”, but prolonged lapses in the non-essential services could derail the housing market’s stabilizing trend. According to a recent HUD report, “If the shutdown lasts and our commitment authority runs out, we do expect that potential homeowners will be impacted, as well as home sellers and the entire housing market. We could also see a decline in home sales during an extended shutdown period, reversing the trend toward a strengthening market that we’ve been experiencing,”
Additionally, “any mortgage loan approval is subject to the review by the mortgage lender of at least one year’s worth of federal tax returns, and must be verified by the I.R.S. through 4506 Transcript.” Until staffers are back at work, those forms are also on hold. However, large lenders selling directly to Fannie Mae are not impacted by the 4506 mandate, so those loans can continue unaffected.
Perhaps the greatest casualty of the government shutdown is as basic as consumer confidence. When faced with political strife, economic uncertainty, and service shutdowns, people hesitate to take dramatic steps, financial risks, or lifestyle changes. Freddie Mac’s chief economist reported, “Consumer sentiment fell for the second month in a row in September to its lowest reading since April.
While the facts show some problems caused by the government shutdown, they are all set to resolve when the shutdown ends. Some homebuyers may even be able to take advantage of the timing to lock in a favorable mortgage rate and come out of this setback, ahead.
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About Tom Davidson — Tom Davidson is Vice President of Express Schools, LLC. which operates online education providers Real Estate Express, Insurance License Express and License Tutor. Follow him on Twitter.