On June 3, President Joe Biden signed a debt limit bill, averting a potential U.S. default. The debt limit, also known as the debt ceiling, is a crucial aspect of the country's fiscal management. In this blog post, we will explore what the debt ceiling is, why it is significant, and what occurred regarding the debt limit in 2023. Lastly, we will closely examine the potential consequences of the debt ceiling on the housing market, shedding light on the forecasts and insights provided by industry experts.
What is the Debt Ceiling?
The debt ceiling refers to the maximum amount of money that the United States government can borrow to meet its financial obligations. It is a statutory limit set by Congress, indicating the total debt the government can accumulate. Once the debt reaches its limit, Congress must take action to raise the ceiling and allow the government to borrow more funds.
Why is the Debt Ceiling Significant?
The debt ceiling plays a critical role in managing the nation's finances. It serves as a mechanism to control government spending and ensure fiscal responsibility. By setting a borrowing limit, the debt ceiling encourages policymakers to make informed decisions regarding spending, taxation, and budgetary priorities. Failure to raise the debt ceiling can lead to severe consequences, including a potential default on debt payments.
The 2023 Debt Limit Bill
In 2023, the United States faced the need to raise the debt ceiling to avoid defaulting on its financial obligations. President Joe Biden signed a debt limit bill on June 3, ensuring that the government could continue borrowing money to meet its obligations. This action was crucial in maintaining the stability of the U.S. economy and preserving confidence in the country's financial system.
Implications of a Default
If the debt ceiling is not raised and the United States defaults on its debt, it can have severe consequences both domestically and globally. A default would erode investor confidence, increase borrowing costs, and potentially trigger a financial crisis. It could lead to a downgrade in the country's credit rating, negatively impacting the economy, and causing ripple effects in the global financial markets.
Congress Passes Debt Ceiling Package: A Comprehensive Overview
The new legislation suspends the nation's $31.4 trillion debt limit through January 1, 2025. This removes it as a potential issue in the 2024 presidential election. After months of stalemate and tense negotiations, Congress has passed the debt ceiling package just in time to prevent a potential government shutdown.
The legislation suspends the nation's debt limit until January 1, 2025, removing it as a potential issue in the 2024 presidential election. Non-defense spending will remain relatively flat in fiscal 2024, with a 1% increase in fiscal 2025. There will be no budget caps after fiscal 2025, only non-enforceable appropriations targets.
The package includes provisions for defense and non-defense discretionary spending. Non-defense discretionary spending will be rolled back to fiscal 2022 levels, with a limit of 1% annual growth for the next six years. Veterans' medical care will be fully funded, with an additional increase in support for the PACT Act's toxic exposure fund. Changes to the food stamps program will temporarily broaden work requirements while expanding exemptions for certain groups. Work requirements will not be introduced in Medicaid.
In terms of Covid-19 relief funds, approximately $28 billion in unobligated funds will be rescinded, but funding for Covid-19 vaccines, treatments, housing assistance, and the Indian Health Service will be retained. IRS funding will be repurposed, with $10 billion from fiscal 2024 and another $10 billion from fiscal 2025 appropriations allocated for non-defense areas.
Regarding student loans, borrowers will need to resume payments at the end of the summer as the pause on payments during the pandemic will not be extended. However, President Biden's plan to provide up to $20,000 in debt relief for qualifying borrowers will be maintained, along with the income-driven repayment plan.
The debt ceiling package does not make changes to climate and clean energy provisions, despite efforts by House Republicans to repeal clean energy tax credits and subsidies. It includes measures in the National Environmental Policy Act to enhance coordination and efficiency in federal agency decision-making. Additionally, the package expedites the construction of the Mountain Valley Pipeline in West Virginia.
Debt Ceiling & The Housing Market: Will it Crash?
The debate surrounding the debt ceiling and the potential for a government default on the national debt has raised concerns about its impact on various sectors of the economy. In this section, we will focus on the insights provided by Zillow regarding the potential fallout on the housing market in the event of a debt default. We will explore the projected effects on home sales, values, mortgage rates, and the overall economic landscape.
Zillow's Forecast: Severe Fallout in the Housing Market
According to forecasts by Zillow, a debt default could have significant implications for the housing market. In the most severe month following a debt default, home sales could drop by up to 23% compared to a no-default baseline forecast. Additionally, home values could be 5% lower than projected in a no-default scenario by the end of 2024. These projections highlight the potential negative impact on both buyers and sellers in the housing market.
Agreement to Raise the Debt Ceiling
House Speaker Kevin McCarthy and President Joe Biden reached an agreement to raise the debt ceiling, averting an immediate default. However, the agreement still needs to be voted on by Congress. The ongoing negotiations and uncertainty surrounding the debt ceiling underscore the importance of addressing this issue to avoid potential economic turmoil.
Rising Mortgage Rates in the Event of a Default
Zillow warns that if the government were to default, the average 30-year mortgage rate could peak at 8.4% in September. Such rates would mark the highest since the early 2000s. Rising debt yields and interest rates are expected as a consequence of default risk, leading to increased borrowing costs for homebuyers. This scenario could further dampen the housing market's recovery and stability.
Recession Risks and Unemployment Concerns
Experts suggest that a government default could trigger a recession, causing a significant decline in GDP and disrupting financial markets worldwide. Zillow emphasizes that spending cuts resulting from default could lead to furloughs among federal and state employees, as well as layoffs in industries indirectly connected to federal spending. These factors could contribute to rising unemployment rates and further economic instability.
In summary, Zillow's insights indicate that a debt ceiling default would have severe repercussions for the housing market, including decreased home sales, lower property values, and increased mortgage rates. The potential recessionary impact and rising unemployment rates are additional concerns. The agreement to raise the debt ceiling is a positive development, but it remains essential for policymakers to address long-term fiscal challenges and ensure the stability of the economy and housing market moving forward.
Sources:
- https://www.zillow.com/research/debt-ceiling-32626/
- https://home.treasury.gov/policy-issues/financial-markets-financial-institutions-and-fiscal-service/debt-limit
