Will U.S. credit downgrade hurt housing market?

In recent weeks, I've fielded several questions from members of the media and others about downgraded credit ratings of the U.S. government and of Fannie Mae and Freddie Mac and what this might mean for the local housing market.

For now, I think it's too soon to say. I think much of the discussion so far is being driven by media coverage and speculation about what all this might do to mortgage interest rates.

In early August, following a last-minute deal in Congress to raise the nation's debt ceiling, Standard & Poor's downgraded the U.S. government's credit rating.

S&P downgraded the nation's top-notch AAA credit rating for the first time in history, moving it down one notch to AA+. This lower rating reflects S&P's reduced confidence in the U.S. government's ability to repay its debts over time.

As the Washington Post explained in a story about this decision, "The impact on your wallet of the Standard & Poor's downgrade of the nation's credit rating is similar to what would happen if your own credit score declined: The cost of borrowing money is likely to go up."

On Aug. 8, Standard & Poor's downgraded the credit ratings of Fannie Mae, Freddie Mac and other agencies linked to long-term U.S. debt. No one seems to know if or when these events might drive up mortgage rates, but news reports continue raising that possibility. I don't want to totally discount such concerns. After all, mortgage rates can't hover around all-time lows forever. And anything that creates confusion among potential homebuyers and erodes consumer confidence could hurt our fragile housing market.

But one reason I don't expect a huge impact here in Southern Nevada is that more than half of all local buyers are paying cash for homes. So, they don't need a mortgage and aren't as concerned about mortgage rates. Secondly, today's historically low mortgage interest rates would still be considered low if they increased slightly.

Any prospective homebuyers who are worried about this uncertainty may want to buy quickly and lock in these very low rates before anything can change.

Lawrence Yun, chief economist for the National Association of Realtors, recently said that even if mortgage rates were to increase as some analysts predict, they would still be less of a concern than other challenges facing the housing market. These include "overly stringent" lending standards that make it harder for potential homebuyers to get a loan and an overall lack of consumer confidence about the economy.

"My thoughts are that the rates may be impacted by 30 basis points at maximum," Yun said. "Mortgage rates will most likely move in the same direction as the government borrowing rate, because there is government backing of mortgages on nearly all mortgage originations in today's market. It is also possible for the rating downgrade to have absolutely zero impact if global bondholders do not care for S&P's opinion.

"After all, information about this country's future deficit is freely accessible and not proprietary to S&P. Furthermore, S&P, as well as other rating agencies like Moody's and Fitch, are still cleaning the egg off of their faces after having awarded the best triple-A ratings to subprime mortgage bundles during the housing bubble years, driven by perverse incentives to get paid by mortgage bundlers. (Just think how Roger Ebert and other Hollywood movie critics would rate a film if they were to get paid by the movie's producers, for example)."

Yun concludes that "a 30-year fixed rate rising from 4.3 to 4.6 percent will not change the housing game that much, but a return to normal underwriting standards and a boost to consumer confidence will be the true game-changer."

Paul Bell is the president of the Greater Las Vegas Association of Realtors. Email him at ask@glvar.org. For more information, visit lasvegasrealtor.com.