In the aftermath of the great debt-ceiling debate in Congress and the House, in which a default on the country’s credit was narrowly avoided, the financial assessment firm Standard & Poor’s downgraded the country’s historically opulent AAA credit rating down to (deep breath) a mediocre AA+.
This means several things. Most importantly, it means that America’s debt is no longer perceived the strongest investment on the global market by a huge credit rating firm, Standard & Poor. The downgrade is a result of S&P’s lack of confidence for our government to absolve its spending to be congruent with the country’s capital. In reaction, markets fell yesterday and the price of gold reached an all time high.
As far as how this will affect everyday life here in America, I have yet to hear any apocryphal stories from my various well-informed news sources. I regularly listen to NPR, read the NYTimes on occasion, and am quite often perusing the Austin Chronicle’s local politics section. Nothing to report here. If any of you know of a story covering the result of the country’s downgrade on everyday Joe’s, by all means share.
However, it is important to examine how the downgrade will affect the ever-struggling housing market.
Early on in May of 2011, the debt ceiling debate was a hushed issue on Capitol Hill. There were signs that the GOP were considering not raising the debt ceiling which would have caused the country to default and send the economy into the “double dip”. The American Progress blog detailed just exactly what would happen in a post earlier this summer.
Should the country default on its debt, interest rates across the board would rise. Because U.S. debt wouldn’t necessarily be guaranteed, those who invest would have to take on more risk to invest. This risk comes in the form of raised interest rates, and the mortgage interest rates would rise dramatically, thus preventing the housing market recovery by depressing the ease of paying off a mortgage, preventing jobs from being created to construct those houses, and reducing homeowners’ current equity.
But, as of last week, the U.S. government managed to avoid default at the risk of a decreased credit rating. Thanks, S&P.
So how does this affect housing? Well for starters, even with a downgrade in our nation’s credit rating, U.S. Treasury bonds are still one of the safest investments in the world. In fact, after the S&P made their announcement last Friday, interest rates for U.S. Treasury bonds have dropped as investors took their money out of the market and put it into bonds.
It seems, the more I read about the downgrade, the more I’m seeing that this move on behalf of S&P is largely symbolic; a result of the tawdry display politicians put on while solving the debt crisis and their inability to do what must be done or come to a mutual agreement. Standard & Poor’s, while having no insider information about markets, was merely voicing its opinion on the matter, and in fact, according to NPR’s Planet Money blog, most investors do their own research and base their investments on more than S&P’s rating.
However, the AA+ credit rating will inevitably have an affect on the perception of consumers and how they will invest their money. This is what will inevitably hinder further growth of our economy, and in turn, the housing market. The more uncomfortable people are about spending their money, the slower the recovery will be.
In respects to housing, it looks like a lot more of the same: a veritable crawl back to healthy levels and overall stagnancy.