The recent agreement reached by both parties in Congress, and the Administration, wasn’t sufficient for U.S. credit to avoid being downgraded by S&P’s credit rating agency from the triple-A rating it had for 70 years to double-A plus. The two other credit rating agencies also reacted negatively with Fitch putting the U.S. triple-A credit rating under review, and Moody’s changing its debt outlook for the U.S. to negative.
Credit rating agencies are concerned about two issues:
- The $2.4 trillion in spending cuts enacted under the agreement for the most part don’t take effect until 2017.
- The $2.4 trillion is only half of what the agency’s believed was necessary for the U.S. to address its deficit.
The major concern for the housing industry is that a continued adverse rating of U.S. debt by agencies will lead to an increase in interest rates for consumers (including mortgage interest), and increase in cost for the U.S. to service its debt. On the surface, this could put a drag on the housing recovery.
The downgrade may not have much of an impact on housing, as housing prices nationwide have reached what most economists believe are rock-bottom prices. Consider the following:
– Investors love real estate– With 30% of home purchases being paid for with cash this year, expect this trend to continue as short-sales and REO properties are released by the banks.
– Cost to service U.S. debt is decreasing– The biggest risk from credit downgrading is that it will cost hundreds of billions more to fund the U.S. debt if investors get scared and demand a higher return on U.S. debt. In reality, Treasuries are still the safest investment in the world. Last week’s rally on Treasuries put to bed any questions about the full faith and credit of the U.S. debt. With problems with the euro-zone debt crisis and a possible U.S. recession, investors scrambled from stocks and riskier investments back to Treasuries. The cost to fund U.S. debt, or the benchmark 10-year treasury rate has dropped from 3.74% in February of this year, to presently just under 2.5%. This means the cost to fund U.S. debt is actually going down so far this year!
– Risk has already been factored into housing– Prices of homes have rolled back to 2002 levels. 10 years of “0” appreciation is a first in our lifetime, and indicates a tremendous upside potential for real estate prices.
– Pent-Up buyer demand is still at an all-time high, with homebuyers having to compete more and more with investors.
– Accelerating rental demand has led to steadily increasing rental rates for tenants. Expect this trend to continue as up to 4 million more homeowners have to give up their homes.
– Real Estate has become one of the safest investments– Consider the dramatic drop in stock values, the risk associated with Europe and emerging markets, and the record prices for gold, and real estate may just be the best bet for investments.
– Foreign buyers– The U.S. dollar, when measured against other currencies, has created a buying bonanza for international buyers as seen by the significant increase in real estate purchases by foreign buyers.