Buying a home is the biggest financial decision most of us ever make, so we want to be sure it’s a sound investment. With the partial government shutdown lasting for so long, many people’s confidence in the economy is, understandably, starting to falter. Although a January 7 survey by the National Association of Realtors® revealed that 75 percent of Realtors have had no impact to their business as of yet, financial markets don’t like uncertainty and the real estate industry depends on the stability of financial markets, which affects things like interest rates and the ability of people to get approved for home loans.
Although it may be obvious how the interest rate market affects real estate (higher rates make home loans more expensive), it may not be as obvious how the stock market affects real estate. The fact is, when the value of people’s stock portfolios drops, they start to tighten their belts, which can translate into buying less of everything—especially big purchases like real estate.
Most conventional mortgage loans are backed by the government entities Fannie Mae or Freddie Mac, and as of mid-January, those loans were still being processed in a timely manner. Same goes for loans backed by the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA), because they allow private lenders to originate loans without agency approval as long as the loans adhere to established guidelines. However, loans through the Rural Housing Service depend on the Department of Agriculture (USDA) and many of its employees remain furloughed.
Although Fannie Mae, Freddie Mac, FHA and the VA have been mostly open for business during the shutdown, the Internal Revenue Service was closed for a short period. This was a problem because nationwide as many as 400,000 home loans per week require IRS income verification to be approved. Luckily for homebuyers, the IRS reopened the income verification program, funding it through the fees it charges for the service. Another barrier in the way of loan approval has been the need for flood insurance, which depends on the National Flood Insurance program under the Federal Emergency Management Agency. Again, happily for homebuyers, after a short closure FEMA was reopened as well using user fees to fund operations.
In addition to delayed mortgage application processing, a government shutdown can lead to increased mortgage and rental payment delinquencies. If you aren’t getting a payroll check, it’s hard to pay your bills. In addition, some federal leases aren’t being paid. This all results in reduced spending in the broader economy, and economic uncertainty causes people to put the brakes on purchasing new homes.
Much as it pains me to say this, since I am an advocate for smaller government in almost every instance, because of how our government is currently structured, this shutdown is not good for the economy so I’d like it to end. If the private sector rather than the government were responsible for more of these functions, a government shutdown would have far less impact on business and individuals (like the 800,000 employees missing their paychecks).
If organizations like Fannie Mae and Freddie Mac were private, the interest rates for single family home mortgages would likely be a bit higher, but at least our taxpayer dollars wouldn’t be used to bail Fannie and Freddie out when they make terrible decisions (as happened with the 2008 recession).
I encourage politicians on both sides of the aisle to get over their egos and reopen the government so business can resume. In the meantime, local Realtors and mortgage brokers are working hard to keep transactions moving, so if you’re in the market for a new home, give your Realtor a call.
If you have questions about real estate or property management, please contact me at rselzer@selzerrealty.com or call (707) 462-4000. If you’d like to read previous articles, visit my blog at www.richardselzer.com. If you send me an idea I use in a column, I’ll send you a $5 gift card to Schat’s Bakery. Dick Selzer is a real estate broker who has been in the business for more than 40 years.