The housing market correction would regain new life if the U.S. defaults, says Moody’s chief economist

Speaking in front of Congress earlier this month, Moody's Analytics chief economist Mark Zandi told senators that by his calculation the U.S. Treasury could run out of cash as soon as early June. If Congress doesn't act, and the U.S. were to default, it'd have broad economic consequences.

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One of the most vulnerable areas of the economy being the U.S. housing market.

See, in the unlikely scenario that the U.S. Treasury were to default—or even appear like it might default—financial markets, Zandi tells Fortune, would put upward pressure on long-term rates like mortgage rates. The average 30-year fixed mortgage rate, which sits at 6.55% as of Friday, he says, could go back above 7% if a default looked likely.

Another big jump in mortgage rates would be a gut punch for many homebuyers and sellers, who were at the brunt of last year's mortgage rate shock. Already, national housing affordability (or better put the lack of affordability) has reached levels not seen since the housing bubble era. If mortgage rates were to spike again, housing affordability could deteriorate to a level that exceeds the bubble.

If mortgage rates were to go higher, Zandi says, it'd accelerate the ongoing housing market correction—which lost some momentum this spring. (The latest forecast produced by Moody's Analytics, which doesn't factor in a default, expects U.S. home prices—which are already down 3% from the 2022 peak—to fall 8.6% peak-to-trough this cycle).

View this interactive chart on Fortune.com

Zillow is also concerned.

On Thursday, Zillow published an article with the headline: "A debt ceiling default would send the U.S. housing market back into a deep freeze."

While Zillow economist Jeff Tucker acknowledges that a U.S. default would be "unlikely," he agrees that it'd see mortgage rates go higher and put the housing market back into a sharp slowdown.

"If the U.S. were to enter default in the coming months, one near-certain consequence would be rising debt yields and interest rates... Introducing default risk, or at least the risk of delayed coupon payments, would be like an earthquake rattling that bedrock assumption, sending ripples through the financial system and causing investors to question the safety not just of T-bills but other assets as well. Critically for the housing market, the interest rates on mortgages would almost certainly rise in concert," Tucker writes.

If the U.S. were to default, Zillow predicts the average 30-year fixed mortgage rate would spike to a peak of 8.4% by September, while home sales volumes would fall 23%. When it comes to home prices, Zillow thinks a default would see national home values go down another 1%.

"Any major disruption to the economy and debt markets will have major repercussions for the housing market, chilling sales and raising borrowing costs, just when the market was beginning to stabilize and recover from the major cooldown of late 2022," Tucker writes.

Want to stay updated on the housing market? Follow me on Twitter at @NewsLambert.

This story was originally featured on Fortune.com

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