Sequestration is worse for homeowners than new buyers

Posted by  on Mar 20, 2013

People looking to buy a home and those looking to refinance a mortgage often have the same interests -- lower mortgage rates help both parties obtain cheaper monthly payments. However, the ongoing budget confrontation in Washington could impact refinancing and purchase plans differently -- and existing homeowners would get the short end of the stick.

Sequestration, housing, and mortgages

Because Democrats and Republicans have been unable to compromise on a budget, a series of automatic spending cuts known as sequestration went into effect on March 1. These cuts are taking money out of the economy at a critical time, when fourth quarter growth had already slowed to near zero.

For those who have been in a position to take advantage of them, record-low mortgage rates have been a beneficial side-effect of the slow economy in recent years. These low interest rates are partly a function of low demand for capital and partly a function of active intervention by the Federal Reserve to push both short- and long-term rates lower. To the extent that sequestration acts as a drag on the economy, it could well prolong this period of low mortgage rates.

To that extent, sequestration could actually help both home buyers and people interested in refinancing. However, if sequestration tips the economy back into recession, it could reverse the recent recovery in the housing market. Lower home prices would be good for buyers -- at least those whose finances were secure enough to still qualify for a mortgage in a recession. In contrast, lower home prices would be a setback for existing homeowners.

That setback would be especially damaging to homeowners who have been waiting to get their property values back above their loan balances so they can refinance. Practically speaking, low mortgage rates are somewhat irrelevant to homeowners who are prevented from refinancing.

Sequestration is just the latest of many wild cards to affect the economy. Even if a budget deal is reached, the Federal deficit is going to continue to have a disruptive impact on the economy. One thing both buyers and refinancers should take from this uncertain environment is not to delay on their mortgage plans when they see an opportunity -- something else may soon come along that would disrupt the opportunity.

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