Debt Ceiling a Downgrade and Mortgage Rates...

Obviously by the title of this post I am not going to be able to cover every intricate detail in regards to possible outcomes, but what I can share with you regarding this large area of concern investors have right now is half real.

Yes we are at a point where if the debt ceiling is not raised our government will run out of money because they continually spend more than they take in in revenue - namely taxes... Consequently for all the bells and whistles to continue and for the government to follow the business as usual course of action they are so comfortable with, the debt ceiling must be raised. Truth be told, there is no way we will be able to solve all of our fiscal problems without a debt ceiling increase, there simply is no time to work through and reform entitlements, and all the other social programs, along with discretionary spending before we run out of money.

With that said, our running into the debt ceiling is not the end of the world that the politicians are proclaiming, in fact our doing so should not mean an immediate default on our current obligations - a favorite talking point in both parties. What I love about financing is numbers don't lie, and the simple fact is we take in enough tax revenue each month (approximately 200 billion) to meet all our major obligations - interest on our debt 50 billion, social security 30 billion, medicare and medicaid 40 billion, military and disability pay 15 billion, let's estimate another 15 billion spent for good measure... add this up and we're left with 50 billion to spend on discretionary. This simple breakdown informs us that the major obligations will be met as long as our Treasury Secretary and the politicians he answers to make sure he pays the important bills first. Things that we will no longer be able to afford will most definitely have an impact on other areas of the government. Our troops will be paid, but their equipment might not be able to be maintained. All Michelle Obama's aids, they should disappear along with most of the staff our elected officials enjoy. Departments like the DOE, DOLR, EPA, State Department, along with others would see severe cuts in their expense accounts... in addition many private companies that depend on government contracts will suffer, so we will see carry over in the private sector should the government debt ceiling not be raised by 8/2.

With that said the debt ceiling not being raised, is not going to have the major impact on our economy that our government would like us to believe. Their power is generated by our (the people) believing that we need them if we want our lives to be better. The simple fact is we don't. True some national parks and monuments will be closed - but if they were to remain closed just because our disfunctional government told us they were, how long would it take before someone just cut the chain and started using the park as it was being used before the government put the lock on the door. Would everyone stop driving just because the DMV shut down and we didn't have the opportunity to enjoy standing in their line to take a terrible picture? Of course we are all worried about our retirement accounts, the stock markets, etc... Even with these things on our mind, it would appear as though the markets have baked in the possibility of the debt ceiling not being raised. If you look at trading over the last few weeks as the deadline looms closer and closer, it's business as usual in the stock market with gains and losses taking place daily. The bond market is still trading at near record lows (regarding yield). It is difficult to draw the conclusion (unless emotion comes into play) that the markets are truly concerned over the debt ceiling.

Of course in the background we have the ratings agencies and their poking the headlines with the fact that if the debt ceiling is not raised and the trajectory of our government's spending habits are not corrected we may face a downgrade. In fact even if the debt ceiling is raised there is a 50% chance that we see a downgrade. This is the real threat. A downgrade to our credit rating would have a substantial impact on our economy and have an immediate impact on the vast majority of Americans. Interest rates would spike and the cost of all debt (unless already locked into a fixed rate) would go up. That means everyone's credit card interest would increase, mortgage rates would go up, our Country would owe more in interest which would mean their needing additional revenue (and the only way those in DC know how to get it is by taxing), and we would find our typical cost of living costs increasing... Those that do not have the extra funds to pay would find themselves in more trouble, credit and obtaining it would tighten making lending more difficult... and the plot continues to thicken.

The threat of a downgrade is the real problem, and we need to make sure those in DC are working to resolve the real problem. Unfortunately the argument has been formed around the increasing the debt ceiling, and not about avoiding a credit downgrade. The assumption is as long as we can raise the debt ceiling we will not have a downgrade. Realistically this is not the case, and raising the debt ceiling and not making significant changes in our spending habits will most likely end in a downgrade. Dangerous water....

So what's this mean in relation to housing? Those locked into a fixed interest rate will be loving life... their payments will remain static while others are forced to make due in a shifting and more expensive market. As for the depressed real estate market and sales... I see home sales suffering and an addition dip in housing prices should future home sales deteriorate. We still have a large inventory of foreclosures, many are still underwater, and banks are not on stable ground yet... The stack of cards is teetering. The best solution is a strong foundation which begins with a fixed rate of interest.

Time will tell... I hope this can be avoided but I am concerned that we have missed the window of opportunity. Let's all hope our politicians can see the light and come to terms that appease the credit rating agencies and we can avoid a downgrade.