A default on the national debt, if Congress is unable to raise the federal debt ceiling in the coming weeks, would raise mortgage rates by at least two percentage points and cause home sales to fall as more expensive financing puts real estate out of reach for more Americans, according to Jeff Tucker , Zillow’s senior economist.

While it is still unlikely that the federal government will default on its bills, the odds have increased in recent weeks due to the ongoing gridlock in Congress, Moody’s Analytics said last week. The chance of debt default now stands at 10%, up from a previous estimate of 5%, the research firm said.

“Any major disruption in the economy and debt markets will have major ramifications for the housing market, cooling sales and increasing borrowing costs, just as the market has begun to stabilize and recover from the big slump in late 2022,” Zillow’s Tucker said.

The average US rate for a 30-year fixed home loan likely to rise to 8.4% in the coming months, he said, from last week’s 6.35%, as measured by Freddie Mac. That increase in borrowing costs would cause house sale fall by 23%, while the US Unemployment rate likely to rise to 8.3% from last month’s 3.4% as the economy entered recession, Tucker said.

That would be a “self-inflicted disaster,” Tucker said.

Jaret Seiberg, a housing policy analyst for the Cowen Washington Research Group, thinks Tucker’s estimates may be too conservative.

“Our view is that the Zillow report may be the best case scenario because our concern is that the credit markets will freeze if there is a default,” Seiberg said.

Former President Donald Trump’s comments on CNN last week increased the chances of a debt disaster, Seiberg said. Trump told CNN’s Kaitlan Collins that the debt default “could be nothing” and could just be “a bad week or a bad day.”

It is in complete contrast to the remarks he made while he was in the White House. On July 19, 2019, Trump described the nation’s obligation to pay its bills as “a very, very sacred thing in our country” and added, “I can’t imagine anyone would ever think of using the debt ceiling as a bargaining chip.” ”

With a slim Republican majority in the House of Representatives, even the few who remain inspired by Trump’s remarks could doom the chance of a deal to raise the debt ceiling, Seiberg said. Negotiating the debt ceiling is not about how much to spend – it’s about paying the bills that have already been incurred.

“We still think a default is unlikely, but that’s based on our belief that politicians understand how dangerous a default would be to the economy,” Seiberg said. “The problem is that, unlike previous fights, not every political leader agrees, as we heard from former President Donald Trump this week. Therefore, we cannot rule out default.”

While economists agree that a failure of the US government to pay its bills would be a recession-inducing disaster, they disagree on the “X date” that means the default would begin. Treasury Secretary Janet Yellen puts the month as June and the earliest potential day as June 1. USA The Treasury announced in January it would use “extraordinary measures” to move money to delay default as long as possible.

Goldman Sachs economists estimate that the US will “probably run out of money and borrowing capacity by the end of July.” Zillow puts the default date as “almost certainly August, depending on the income tax revenue stream this spring.”

“IT IS impossible to predict with certainty the exact date when the Treasury will not be able to pay all the government’s bills,” Yellen told the Independent Community Bankers of America on Tuesday. “Every day that Congress does not act, we experience increased economic costs that could slow the American economy.”

The mortgage market is already showing signs of investor fear. Last month, the spread between 30-year fixed mortgage rates and 10-year Treasury yields reached its highest level in nearly 40 years. When spreads are wide, mortgage rates that track the 10-year Treasury yield are higher than they would otherwise be because investors demand a risk premium.

In the first week of May, the spread was 2.95 percentage points, close to 3.07 in mid-March, which marked the largest margin since 1987, and surpassing 2.96 in late December 2008, which was the Great Recession’s widest spread. comparing the weekly Freddie Mac rate average to 10-year Treasury data from the Federal Reserve.

“We’re already seeing the impacts of progress,” Yellen said. “The American economy hangs in the balance.”