On September 30, the federal government shut down or significantly reduced staffing for many of its programs because of Congress’ failure to pass a budget for this fiscal year. The shutdown appears set to affect the real estate market; the only question is, how much will the real estate market be affected?
If a buyer is paying cash on a transaction, the government shutdown will have no impact. However, most buyers utilize various forms of loans, and the shutdown, depending on how long it lasts, will negatively impact those transactions. The Federal Housing Administration (“FHA”), which guarantees loans, makes up almost one-third of the mortgage market. Although the FHA continues to operate, it is doing so with an approximate 90% reduction in staff. While the FHA is available to underwrite and approve proposed loans, if the shutdown continues for a substantial period, delays in agency approval will be inevitable. That will lead to delays or even cancellations of deals if lenders aren’t willing to close loans without the backing of FHA guarantees. In a real estate market just starting to climb out of a recession, any type of delay is detrimental to its recovery.
Fannie Mae and Freddie Mac loans make up the majority of the remaining mortgage market. Fannie Mae and Freddie Mac aren’t government entities. Rather, they buy loans on the secondary market. Therefore, neither organization is in danger of being shut down, but their loans will be adversely affected by the shutdown. That’s because part of Fannie Mae and Freddie Mac’s loan approval process does involve government agencies—for example, verifying a borrower’s income through the Internal Revenue Service, verifying a borrower’s social security number via the Social Security Administration and obtaining flood zone certificates from the Federal Emergency Management Agency. Each of these federal agencies is either currently suspended or facing significant reductions as a result of the government closure.
In the short term, the real estate market shouldn’t be significantly affected by the shutdown. That’s because many of the approvals and verifications needed from government agencies have been received. However, if the shutdown lasts for an extended period, that will change. Loans will be delayed or even canceled because of outstanding approvals and documents.
A review of history doesn’t provide a good gauge of the effect of the current government shutdown. The last one occurred in 1995 and lasted 21 days. However, the percentage of FHA-backed loans today is a much more significant portion of the mortgage market than it was in the past. Further, the real estate market wasn’t coming out of a recession in 1995. If the government shutdown continues for a significant period, there will be an adverse impact on the real estate market. “How much?” is the only question—and a question that no one wants answered.