A debt default by the U.S. government is unlikely, but if it were to transpire, the cost of a mortgage could increase by 22 percent, pushing rates to a peak above 8 percent in September, according to Zillow.

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If the U.S. government defaults on its debt — a possibility as soon as June 1 if no intervention is made — the costs of owning a home could soar, according to a report released on Thursday from Zillow.

The cost of a mortgage could increase by 22 percent, pushing rates above 8 percent and outweighing any small dip that might occur in home prices, the real estate portal and data company notes. As a result, home sales could see a sharp decline.

Zillow also points out that a debt default is not likely — the U.S. has never defaulted on its debt before — but this analysis plays out what might happen in a worst-case scenario.

Jeff Tucker

“Homebuyers and sellers finally have been adjusting to mortgage rates over 6 percent this spring, but a debt default could potentially raise borrowing costs even higher and send the market into a deep freeze,” Zillow Senior Economist Jeff Tucker said in a statement. “Home values might not see a notable drop, but higher mortgage rates would severely impair affordability, for first-time buyers especially.

“It is critically important to find a solution and not put more strain on Americans who are striving to achieve their homeownership dreams.”

Rising interest rates would likely follow a debt default as confidence in Treasury bills being repaid would waver, and investors might require a greater return before buying them. Since mortgage rates typically mirror the moves of Treasury rates, mortgage rates would also be expected to increase.

In this scenario by September 2023, mortgage rates could peak at 8.4 percent, likely freezing sales in an already tenuous real estate market. Such rates would also discourage sellers from entering or reentering the market, since many secured rates around 3 percent and would unlikely be willing to give up such low rates.

If that kind of economic landscape materialized, nearly one-quarter of expected sales would not transpire, Zillow said. The largest projected deficit would occur in September, with an anticipated 23 percent fewer existing home sales.

In the unlikely event of a debt default, Zillow economists do not expect home values to decline significantly since continued low inventory would prevent prices from falling too far. Based on Zillow’s analysis, home values would fall by 1 percent from current levels through February 2024 and would still increase by 1 percent from today through the end of 2024.

In a future without a debt default, economists anticipate home values to grow by 6.5 percent through the end of 2024.

Email Lillian Dickerson

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