The shutdown is forcing many people that work for the government to stay home, without pay. This has a wide ripple effect that impacts more than direct government employees and their families. Tourists are postponing trips because they can’t visit state parks or historic sites, such as in my trip to the Smokey Mountains last week. Home loans are being delayed due to understaffed offices, the retail industry is taking a hit at its peak season, and consumer confidence is plummeting.
The obvious is that the average government employee, including all classes of workers from janitors to lawyers, is going to have difficulty making their mortgage payment. The shutdown initially forced 800,000 workers to go home without pay. The longer the shutdown continues, the more difficulty these people will be facing. The lack of income may possibly force many to default on their mortgages.
The shutdown is also quite untimely as the peak retail season, when stores make up approximately 20 percent of their annual sales, is about to begin and they are having difficulty importing their inventory and processing the paperwork for seasonal staff. Goods that are imported must go through inspections that are regulated by the government, with fewer employees the shipments may be delayed. Retailers also hire about 700,000 seasonal employees, the system that determines citizenship and immigration status for the new employees is also run by the government. If the shutdown continues into November it may leave stores overstocked well after the holidays and many more people without income.
Consumers are worried and spending less. The longer the shutdown continues, the more trouble Americans will have with trusting the government and the economy.
What does this mean for the housing market?
Many of the government offices that are partially shutdown are responsible for processing home loan paperwork. Homebuyers who are insured by the FHA won’t be able to process their loans, putting a stall on the growth of the Florida real estate market. Just as we have been seeing the market start to pick up, along comes this potential threat.
Lenders are processing more paperwork to compensate for the government’s inability to provide proof of income for potential borrowers, making the already arduous loan application process longer. Lenders are also using their own capital to fund loans, instead of selling the loans to Fannie Mae and Freddie Mac, the government-funded mortgage companies. At this rate, the lenders will soon run out of capital, leaving them unable to offer more mortgage loans.
As people continue to lose faith on the strength of the economy, they will also limit their spending. Inevitably, this trend will have a negative impact on the economy. As the economy worsens we will probably start seeing higher foreclosure rates.
Initially, the government shutdown seemed to only affect the people working for the government. However, if the shutdown is prolonged it may have a negative impact on the entire economy.