Grim home loan prediction as ‘crisis’ looms

New analysis shows if the US were to default, mortgage repayments would reach all-time highs, while experts have warned it would make the 2008 global financial crisis seem like a mere bump in the road in comparison.

The issue lies in the fact the nation is running out of cash – fast – and tense negotiations are currently underway in Congress regarding the US debt ceiling, which currently sits at $US31.4 trillion ($A46.8 trillion).

Democrats want the ceiling to be raised immediately, while Republicans are pushing for a range of conditions such as spending cuts to be met before agreeing to lift the self-imposed borrowing cap.

There are fears an agreement won’t be reached in time, with some saying a default could happen as soon as June 1 in what has been dubbed as the ‘X-date’. The US has never defaulted before.

As the world’s largest economy, a US default would send shockwaves across the globe that would be inescapable for us all.

Horror home loan prediction

Major American real estate firm Zillow released a grim prediction of what would happen to the USA’s property industry if a default were to occur.

Zillow’s data found that mortgage repayments in the US would surge by 8.4 per cent if politicians failed to raise the debt ceiling in time.

An increase of that amount would in real terms make the loan on an average property in the States go up an eye-watering 22 per cent.

Unsurprisingly, such an occurrence would instantly cool the property market, which would be bad news for people on either side of the spectrum — buyers and sellers. It would particularly be bad news for first home buyers who would possibly have no hope of entering the market unless they had significant financial help.

In an example of the dire scenario, Zillow revealed that a US$500,000 (A$753,000) loan with an 8.4 per cent repayment rate would lump borrowers with a hefty debt.

These typical homeowners would need to fork out US$3,800 (A$5700) per month. That’s a significant jump to current levels, which sit at$3,095 (A$4660) on a rate of 6.3 per cent.

Horrifying ‘risk’ just weeks away

If the US were to default, that would mean the nation wouldn’t be able to pay any of its financial obligations — which would include paying government employees, government contractors and members of the military, as well as government payments to areas like funding for food stamps, grants for medical care, highways and education, according to CNN.

The Congressional Budget Office (CBO) warned that there was a “significant risk” of failing to fulfil these obligations in the first half of June if politicians did not come to an accord.

For an idea of the scale of the looming nightmare, in a single month, the CBO said the US sends out US$25 billion (A$37 billion) in pay or benefits to active or former members of the military, interest repayments of $50 billion (A$75 billion) and end of month repayments of between $10 billion and $16 billion (A$15 billion and A$24 billion).

According to White House economists, a short default would see around half a million jobs disappear, driving the unemployment rate up by 0.3 percentage points. It would also push up interest rates, drop equity prices and send the GDP into free fall.

A longer default would be even more grim, with 8.3 million jobs gone and unemployment soaring by five percentage points higher.

Wall Street has placed the potential default “X-date” – the date it will no longer be able to pay the bills – even earlier, in late May, while a new analysis from The Bipartisan Policy Centre puts the date slightly later, from early June to early August.

“I still don’t think now is the time for panic, but it’s certainly time to start getting concerned because we’re possibly only weeks away from the X-date,” Shai Akabas, director of economic policy at the Bipartisan Policy Centre, told CBS News.

But regardless of when the date occurs, it would cause dire consequences for creditors, contractors and everyday citizens alike, with the government failing to pay its bills including wages, welfare and other payments.

Treasury Secretary Janet Yellen said a default would cause “an economic catastrophe” both in the US and across the planet.

Ms Yellen is currently in Japan for a meeting with G7 finance ministers and central bankers.

She told reporters on Thursday that a default would unravel the work that had been done to repair the economy in the wake of the Covid pandemic.

“A default would threaten the gains that we’ve worked so hard to make over the past few years in our pandemic recovery. And it would spark a global downturn that would set us back much further,” she said.

“A default is frankly unthinkable.

“America should never default. It would rank as a catastrophe.”

Kazuo Ueda, Japan’s central bank governor, agreed and said a default would be a “big problem” and that: “ … the Fed alone, for example, may not be able to counteract it”.

‘Financial armageddon’

IG Markets analyst Tony Sycamore previously told news.com.au that if America were to default, the result would be “devastating”, and could spark a worldwide financial panic.

“The Department of Treasury estimates the X-date to be June 1; however, with special measures, i.e. short-term fixes and compromise, the X-date might be drawn out until late July or even September,” he explained.

“If negotiations fail to lift the debt ceiling and the X-date is crossed, it would be the first-ever time the US has defaulted on its debt. The fallout would be devastating for markets and for the US.”

Mr Sycamore said a default would spark a “financial Armageddon”.

“The rise in interest rates that would follow a default would make recent central bank rate hikes appear insignificant. Stock markets would crash, wiping out retirees and other investors,” he said.

“The plumbing of the world markets, which rely on the US dollar and US-denominated dollar debt, would buckle and freeze. It would be the equivalent of a financial Armageddon, making the Global Financial Crisis seem like a walk in the park.

“The loss of confidence in the financial superpower that is the US would likely be irreparable.

“Hopefully, lawmakers can find a way to avoid it this time, as they have in the past as the fallout is simply unthinkable.”