John Whitefoot: The best time to look at certain sectors and stocks is when investors are running for the exits. Unfortunately, the U.S. government shutdown and looming debt ceiling deadline have sent investors scurrying in every direction. Still, one area that will be negatively impacted should the U.S. government shutdown continue and the debt ceiling limit not be raised is the slowly rebounding U.S. housing market (NYSEARCA:IYR).
That doesn’t mean investors should shun the U.S. housing market and homebuilder stocks (NYSEARCA:XHB) altogether; if anything, the current lull is the perfect time to take a closer look at this sector. Both the shutdown and debt ceiling will eventually be in the rearview mirror and the wheels of economic progress will sputter back to life.
According to the latest S&P/Case-Shiller Home Price Index, U.S. house prices rose 12.4% for the 12 months ended July 31, the biggest annual increase since February 2006. Home prices, which have climbed 16% since the beginning of 2012, are still roughly 22% below their 2006 pre-recession highs, meaning, there is still plenty of room to run before the U.S. housing market can say it has fully recovered.
Unfortunately, the U.S. government shutdown and fears about the debt ceiling are coming just as construction and new housing sales are beginning to show signs of life. Residential starts in August were up slightly (0.9%), with an annual pace of 891,000—a marked improvement over the April 2009 low of 478,000 starts.
There are a number of ways a long-term government shutdown would exacerbate growth in the U.S. housing market. Because federal employees are furloughed, there is no one to approve mortgages; those in the process of getting one could be delayed, as banks and lenders are unable to verify social security numbers and IRS transcripts. On top of that, the U.S. Department of Agriculture, which is responsible for backing mortgages in rural areas, isn’t taking on any new business during the shutdown.
Failing to raise the debt ceiling means interest rates on U.S. Treasuries would rise. Mortgage rates, which are tied to interest rates on Treasuries, would probably rise, making home ownership less affordable for many home buyers in the U.S. housing market.
For now, it’s fair to say that paralysis in Washington has significantly increased the risk of slowing the U.S. housing market recovery. That said, the U.S. has never really defaulted on its debt, and while it’s impossible to say it will never happen, chances are good that the decline of the American economy will be diverted.