Los Altos Real Estate Blog

Yes, I'm serious!  What's the immediate and long-term impact of the Fed's loss of the "AAA" credit with S&P?  Other than a drop in the stock market and rise in the cost of government borrowing, what else does this mean to home buyers and sellers?  Will this move derail the real estate recovery or help it?  At the end of the day, what matters most with all this political positioning is the material impact on our everyday lives.  There's a silver lining to every cloud, even this one.  After all the dust settles from the initial shock of the downgrade, we'll see some positives and negatives.

The Positives

• Lower energy prices:  Gas, oil, etc will all drop because a weekend economy means less spending on things like driving.  This means lower utility bills and more money for borrowers to save or spend.
• Lower food prices:  The cost of farming and shipping food will drop as energy prices drop.  This could reduce the monthly grocery bill which means more money available to stay in existing homes or homebuyers to save.
• Interest rates will stay low allowing buyers to obtain excellent 30 year loans or further reduce the cost of a loan modification.  It all depends on what your mortgage is tied to.  An ARM is usually tied to short-term, more volative interest rate moves and could go up.
• Moody's, Fitch, and others have kept their ratings the same and many major investors, such as Warren Buffett, have said the S&P decision is a mistake.

The Negatives

• Consumer credit could rise for items such as credit cards and car loans.  This is because short-term rates are likely to rise as the bond markets adjust to the credit rating.  If so, it could be a small bump but they could wipe out gains from dropping energy prices.
• Federal debt will rise which means they've got to get money from somewhere.  That could translate into higher taxes, fewer cuts, or other decisions that could impact jobs, corporate spending (which creates jobs), and thus fewer home buyers.
• The purely psychological impact of seeing the stock market drop!

Keep in mind that psychology plays the most important role in the overall economy.  Perception is reality.  Any hint at a possible negative in the markets will translate into buyers who balk at spending money or sellers who think the market will drop.  Either way, if buyers wait for prices to drop and sellers don't want to go on the market because they think prices will drop, we'll see less activity.  Regardless of the degree, consumers will take a "time out" to think about all this and it could derail the current real estate recovery.

Now, more than ever, we need to let people know that jobs are being created, interest rates are low, prices are reasonable, and this is an excellent time to buy a home.  This short term political gambit is nothing more than a game of chicken between the economists at the S&P and Congress.  While they sort it out, we need to focus on continuing to stabilize the housing market across the country.  Read up on what's happening, be well informed, and pass along the reality (not the news sounds bites) to your clients both present and past.