The impact of a federal government shutdown on the economy and the U.S. housing market would likely be small, unless it lasts much longer than expected. It could temporarily bring down mortgage rates, which would boost homebuying demand–except in Washington, D.C., where many federal employees would be furloughed. Homebuyers relying on government-backed mortgage loans and flood insurance will also encounter delays.
With less than a week to go before a potential government shutdown, many Americans are wondering what it could mean for the economy. The answer: The economic impact would be fairly small, as would the impact on the U.S. housing market–except in the Washington, D.C. area, where it could have some ripple effects.
Impact on overall economy: Treasury yields likely to decline, Fed less likely to hike interest rates
The U.S. government has shut down four times since the 1990s, with an average length of 14 days. Several federal agencies stop nonessential work, and hundreds of thousands of government employees are furloughed.
Goldman Sachs has estimated that each week the federal government is shut down equals a loss of roughly 0.2 percentage points of GDP. The shutdown only impacts discretionary government spending; it still spends money on mandatory services and debt servicing. Some departments are funded even during a government shutdown, as are some workers who are deemed essential.
The impact is also fairly minimal on the financial markets. Equities typically tick down a bit at the start of a shutdown, but then come back up to pre-shutdown levels by the time it’s over. Treasury yields typically decline slightly. A shutdown makes the Fed slightly more likely to pause interest-rate hikes in November, but unless the shutdown goes on for longer than expected, it will have a small impact compared to incoming economic data, like the next inflation and jobs reports.
But that economic data could be delayed. If the Department of Labor and Department of Commerce aren’t funded, their monthly reports on jobs and inflation could be delayed. That may mean the Fed has less data than they’d like in November when they decide on a possible interest-rate hike.
Impact on housing market: Mortgage rates may come down temporarily, delay in FHA/VA loans, demand likely to dip in D.C.
Mortgage rates could come down slightly
- A government shutdown could bring mortgage rates down a bit if longterm Treasury yields fall with slightly greater recession worry–but rates would probably go back up once the shutdown ended. That could provide a small boost to homebuying demand around the country.
- On the flip side, shutdowns typically bring down consumer sentiment, which could counteract that boost. Both of these effects would likely reverse once the shutdown ends, unless the government stayed closed for a very long time.
Delays in government-backed mortgages and flood insurance
- From a logistical standpoint, homebuyers getting a mortgage backed by the federal government–such as an FHA loan or a VA loan–are likely to encounter application delays. That’s because buyers secure FHA loans through the HUD and VA loans through the Department of Veterans Affairs, both of which are likely to be impacted by the impending shutdown. Roughly 14% of U.S. loan applications are FHA, and about 11% are VA.
- Homebuyers who need government-backed flood insurance, a scenario that’s particularly prevalent in flood-prone parts of the country like Florida and Louisiana, will also be impacted. Home purchases involving government-backed flood insurance are likely to be delayed because funding for the National Flood Insurance Program would be halted.
Dampened demand in Washington, D.C.
- The biggest impact would be on the Washington, D.C. area, which is where federal government workers are concentrated. A furlough would bring homebuying demand in D.C. down for as long as it lasts, and possibly a month or two after it ends, because workers won’t be paid for a few weeks.
- The shutdown is unlikely to last long enough to render furloughed workers unable to make rent or mortgage payments. Workers are typically given backpay, and lenders could offer forbearance until workers receive their pay. But forbearance probably isn’t necessary for most workers because many of them can dip into savings to cover one payment.
- If the shutdown lasts longer than usual, the impact could be bigger.
Editor’s note: This report was updated on September 29, 2023 with the addition of the likelihood that FHA/VA loans and government-backed flood insurance will be delayed.