The Verge of Default

The current government shutdown has been casting a rather ominous cloud over the future of the housing recovery. While many of the initial effects have been reported as slight, the general consensus is that the longer it continues, the more severe the effects will be and the more damaging the result on an already fragile housing recovery.  But what if there is no immediate solution. What happens if the government actually defaults on its debt?

Real Estate Economy Watch describes knuckles in the housing industry as turning white as the October 17 default deadline nears.  Gary Thomas, president of the National Association of Realtors, claims that “unless the debt ceiling is raised in ‘a timely manner,’ the country would face a recession that would wipe out the recent progress made in home prices, home sales and new residential construction.” The same report puts the cash-flow deficit just above 4% of US GDP, the same size as the post-housing bubble burst.

Worsening the already ominous nature of this political setback are reports that the US shutdown could spill over to the rest of the world, particularly Europe.  The shutdown is affecting the comfort level of investors in the United States Treasury, the largest and most liquid bond market.  Japan is already selling off treasury investments at a rate not seen since 2001.

A NASDAQ article today reported that International Monetary Fund Managing Director Christine Lagarde warned the combination of the U.S. shutdown, combined with a default on the debt would cause "massive disruption the world over.”  On a more hopeful note, however, the same article quoted a foreign exchange analyst at Societe Generale as saying, “…given the Republicans' plummeting approval ratings, we remain confident that a deal on the debt ceiling will be reached before a Treasury default."

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