Almost everyone I talk with is totally disgusted by the dysfunctional circus playing in Washington over the debt ceiling. People are venting their frustration in blogs and posts all over the internet, so that isn't the purpose of this post. The uncertainty, though, is taking it's toll on real estate in some very concrete ways both here and I'm sure across the country.
The biggest wild card is interest rates, specifically what will happen to mortgage rates if the debt ceiling isn't raised and interest rates rise as a result. Nobody seems to have a good handle on how high mortgage rates may climb if the unthinkable happens. A quarter or half point won't likely have that great an impact — the rate for a 30 year fixed mortgage would hover in the 5% to 5.25% range, still historically very, very low. But a 1% jump would change the affordability picture big time.
A question I'm getting from buyers is how they can protect themselves from skyrocketing interest rates if they go into contract on a house. One way, of course, is to lock their rate now. But the longest rate lock available is typically 60 days, and in some situations — particularly short sales — the transaction may be unlikely to close in 60 days. I've heard of a few situations recently where buyers have decided to lock and pay extension fees at the other end, to hedge. The fee to extend can be as much as 1% of the loan amount, and the option to extend (and the cost to do so) may not be guaranteed.
Another option is to put a rate cap in the contract as part of the financing contingency, so if the buyer is not able to get a mortgage loan at or below the specified interest rate they can cancel the deal. The spread may be 1/2% above the rates being quoted at the time of contract. Sellers typically don't like rate caps, because they see them as an out for buyers. But the risk exposure for sellers is generally pretty short. Buyers usually lock their rate within a couple of weeks of having executed contracts. The exceptions are short sales (where buyers may wait until lender approval of the short sale to finalize their mortgage) or transactions involving subdivision or some other factor that will add to the closing time.
If we enter a volatile interest environment, buyers can't be expected to shoulder all the risk. If sellers insist they shoulder all the risk — by refusing to accept rate caps or share the cost of extension fees — buyers may just close their checkbooks and wait on the sidelines until things settle down.