Downgrade Effect: Higher Rates, Elevated Inventory

• August 8th 2011

by Mark Wellborn

As the Dow took a nosedive on Monday following Standard & Poor’s downgrading of the U.S. credit rating, Jonathan Miller weighed in on the MRIS blog with his thoughts about the effect on the housing market.

UrbanTurf readers might remember the article that we did a couple weeks ago that examined what would happen to the housing market if a debt ceiling resolution wasn’t reached by the August 2 deadline. In that piece, Miller noted that interest rates and borrowing costs would likely go up and that the “indecision and lack of direction at the federal level [was creating] a sense of caution that causes potential home buyers to sit and wait.”

With the downgrading of the country’s credit rating (as well as that of Fannie Mae and Freddie Mac), here is a quick snapshot of what else he thinks will happen:

• Potential home buyers will likely take longer to make a decision.

• A slow down in sales activity could cause inventory to rise.

• Higher borrowing costs could not only have an adverse effect on home owners, but also companies, which could slow down the hiring process.

“The handling of the debt ceiling debate in July sealed the fate of eventual US and Fannie/Freddie downgrades, a decision that should have been made a few years ago by the rating agencies that ironically helped enable the economic problems we now face,” Miller told UrbanTurf via email. “Love them or hate them, the S&P actions force the issue and is the first step on a long road toward repairing our financial and housing markets rather than simply kicking the can down the road.”

One of his final thoughts was that low mortgage rates are keeping credit tight and that increasing interest rates could actually help the housing market. In short, low mortgage rates are forcing banks to choose between “enjoying the spread” risk free from the Fed versus issuing mortgages to consumers. Miller noted that he would elaborate on this theory in a future post.

This article originally published at https://dc.urbanturf.com/articles/blog/downgrade_effect_higher_rates_elevated_inventory/3941.