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Washington’s $38 trillion debt and growing deficit of $2 trillion a year risks increasing investor demand for higher returns and raising the cost of mortgages and construction financing, according to an analysis by the Cato Institute. Dennis Shea of the J. Ronald Terwilliger Center warns that rising federal debt creates uncertainty that will likely lead to higher Treasury yields and higher mortgage rates. Daniel Hale, chief economist at Realtor.com, said mortgage rates have risen along with 10-year Treasury yields despite the Federal Reserve’s interest rate cuts, due in part to concerns about the federal debt. Cato predicts that social programs and debt interest rates could use up all federal revenue by 2036, crowding out loans to private home builders amid a housing shortage of 4.03 million units.
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The next obstacle to affordable housing may not be inflation or the Federal Reserve, but Washington’s $38 trillion debt burden, experts say.
The next obstacle to affordable housing may not be inflation or the Federal Reserve. That could result in a $38 trillion debt burden for Washington.
President Donald Trump’s 2027 budget proposal offers no clear plan to stabilize the nation’s debt, even as the annual deficit increases by $2 trillion, according to an analysis by the Cato Institute. This level of debt will impact housing. If investors demand higher returns to continue lending to Washington, the government could borrow more and raise financing costs.
“Sustained budget deficits and rising federal debt will further increase uncertainty about Washington’s fiscal capacity,” said Dennis Shea, executive vice president and director of the J. Ronald Terwilliger Housing Policy Center. “Increased risk perception is likely to cause investors to demand higher yields on U.S. Treasuries, which could also drive up mortgage costs and construction financing costs.”
Daniel Hale |Credit: Realtor.com
The concern is not a short-term spike, but rather the possibility that long-term interest rates will remain high even if the Fed lowers short-term rates. Daniel Hale, chief economist at Realtor.com, said that when the Fed cut interest rates across the board from September to December 2024, mortgage rates rose by about the same amount as the 10-year Treasury yield.
“In addition to concerns about the inflation outlook for the second half of 2024, some analysts have suggested that rising federal debt is to blame for this disconnect,” Hale said.
According to Cato’s analysis, Social Security, Medicare, Medicaid and interest payments on existing debt are projected to use up all federal revenue by 2036. Mr Xia also warned that rising government debt could crowd out private sector financing available to home builders, adding supply-side pressure to a market already facing a housing shortage of 4.03 million units.
Speaking at Harvard University in March, Federal Reserve Chairman Jerome Powell said, “The level of debt is not unsustainable, but the trajectory is not.”
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