10/13/13: Government Shutdown and Debt Ceiling Debate – Ramifications for Investors

Because the US dollar is the reserve currency of the world, what happens in Washington DC and at the Federal Reserve has a big effect on the rest of the world.

Likewise, how the world responds to Washington and the Fed affects the strength of the US dollar, which in turn affects interest rates.  And of course, interest rates profoundly affect real estate investors.

So while the government shutdown is one level of stress, a possible debt default is a potential crisis of much larger proportions.

In the studio to talk about what the government shutdown and debt ceiling debate might mean for real estate investors:

  • A man with no ceiling on his talent, your host Robert Helms
  • His debatable co-host, Russell Gray

At least for a little while longer, the U.S. is the world’s “biggest” economy.  And the U.S. dollar is the gold standard (well, technically that’s not true anymore) for currency stability.

This unique positioning allows Washington DC to spend virtually without limit and the Federal Reserve Bank to print HUGE volumes of dollars – again, virtually without limit.  And unless you’ve been on vacation off-planet for the last 5 years, you know there’s been a whole of spendin’ and printin’ goin’ on.

Long time listeners know we’ve been covering this topic for quite some time.  In our estimation, it’s one of the most important, yet least understood, factors affecting long term real estate investors in two critical areas: market selection and financing.

But even flippers are affected.  After all, most flippers are relying upon a takeout buyer who is often relying upon financing.  As interest rates rise (the result of higher perceived risk for buyers of US Treasuries), the pool of available takeout buyers and the size of the loan they can qualify for shrinks.  And that’s just a ramification from the debt ceiling debate.

What about the government shutdown?

One of the results of the Great Recession, whether by design or by default, was the effective nationalization of the mortgage industry.  That is, a huge majority of home loans emanate from government agencies such as FHA, VA, Fannie Mae and Freddie Mac.  And when they’re shut down, no loan approvals are happening.  So sellers who are counting on their buyer’s loan to cash them out are stalled.  It’s frustrating for the seller, the buyer and the agents – not to mention all of the ancillary service providers.  Lots of collateral damage.

Then there’s the buyers who may be counting on their tax refunds to help with their down payments.  When the check writing department of the IRS is closed, no checks get sent.  It’s interesting that the check CASHING department stayed open.  But that’s the topic of a rant for another day.

Still, as inconvenient and frustrating as the completely avoidable government shut down is, few consider it to be the “big” threat that a debt default would be.  But because this isn’t the first time the world has watched the U.S. flirt with a first ever default, rather than get carpal tunnel writing about it all over again, we simply refer you back to our multi-part blog on the Great Debt Ceiling Debate from the Summer of 2011.  If you aren’t quite sure how all this affects mortgage interest rates, this blog series is for you.

Like we said in 2011, and we’ll say again,  a traditional default is unlikely.  What’s much more likely is that the debt ceiling will be raised, Congress will continue to spend without restraint, the Fed will print (buy Treasuries) to fund the debt, and the dollar will continue its slow and steady slide.  In other words, business as usual.  To paraphrase Jim Carrey from Dumb and Dumber, “What was all that hope and change talk?”

Here’s the bottom line: When you’re buying a property and getting a loan for the long term, the long term direction of the dollar creates both challenges and opportunities that every real estate investor should be aware of.  This is a topic we’ll continue to cover for our listeners, because so much of financial media doesn’t address the topic in a way that relates to real estate investors.  But have no fear!  The Real Estate Guys™ are here!

So listen in to the discussion and consider how the government shutdown and the debt ceiling debate affect YOU and YOUR portfolio.  Enjoy!

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