Experts Debate Impact of U.S. Credit Rating Downgrade on Housing Recovery

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On this past Friday night, Standard & Poor's rating agency lowered the long-term rating of the U.S. government and federal agencies from AAA to AA+, for the first time in U.S. history.

According to Standard & Poor's U.S. Credit Downgrade Report released on August 5th, the primary reasons for their downgrading the credit of the U.S. sovereign debt were twofold: Rising Debt Burden and Negative Outlook.

Standard & Poor's (S&P) further comments in their report: "We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues, is less likely than we previously assumed and will remain a contentious and fitful process."

Key highlights of Standard & Poor's Credit downgrade report:

• We have lowered our long-term sovereign credit rating on the United States of America to 'AA+' from 'AAA' and affirmed the 'A-1+' short-term rating.

• We have also removed both the short- and long-term ratings from CreditWatch negative.

• The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics.

• More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.

• Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the  Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government's debt dynamics any time soon.

• The outlook on the long-term rating is negative. We could lower the long-term rating to 'AA' within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period resulted in a higher general  government debt trajectory than we currently assume in our base case.

John Chambers, the head of sovereign ratings at S&P, said in an interview on CNN Friday night, "Political brinkmanship over the debt ceiling proved to be a key issue, with the U.S. government getting to the last day before they had cash-management problems."

Mohamed el Erian, CEO of PIMCO, one of the largest bond investment firms in the world, stated this weekend that "One of the key factors to watch is S&P's focus on the 'Negative Outlook' of U.S. debt. It sends a clear signal that if U.S. fiscal policy doesn't come under control within the next year, the U.S. may be looking at a second downgrade."

To calm national and global banking fears this week, the federal banking agencies are providing guidance to banks, savings associations, credit unions, and bank and savings and loan holding companies.

For risk-based capital purposes, the Federal Reserve's Board of Governors is now reporting that the risk weights for Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies, and government-sponsored entities will not change.

The Federal Reserve further states that the treatment of Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies, and government-sponsored entities under other federal banking agency regulations, including the Federal Reserve Board's Regulation W for example, will also be unaffected.

This downgrade's impact on the U.S. housing market has the potential to be significant over time according to some industry experts.

A number of Wall Street analysts are now predicting that interest rates across the board in the U.S. are assumed to rise in the coming months, which will drive up the rates of consumer adjustable rate mortgage loans, credit cards, car loans and a host of other financial products.

For future home buyers, fixed rate mortgages are now expected to go higher as well, thus making it even harder for millions of consumers to qualify for a new mortgage, thus causing a further buying drag of U.S. home sales.

If foreign countries request a 1% rate increase from the U.S. on current debt owed, that will add an additional $1.4 trillion of interest to the U.S. debt over the next 10 years, effectively wiping out the entire deficit savings made by Congress last week.

Yet some industry experts have a contrarian view, and predict little impact on the U.S. economy.

According to Roger W. Soderstrom, founder of Orlando-based Stirling Sotheby's International Realty, "The sun did rise again this morning and it is business as usual. I do not feel the downgrade by one of the three rating groups was a total surprise and maybe it will be a wakeup call for Washington and our politicians to start working together on real solutions. As for the U.S. and specifically Florida real estate market, I do not feel we are going to see any major impact. After five challenging years we have become a much more resilient society and I don't feel we will see any overreaction."

Billionaire Warren Buffett said in an interview with Bloomberg Television this weekend, "Standard & Poor's erred when it lowered the U.S. credit rating and reiterated his view that the economy will avoid a second recession. The U.S., which was cut Aug. 5 to AA+ from AAA at S&P, merits a 'quadruple A' rating."

Vanessa Grout, CEO and President of Douglas Elliman Florida tells the World Property Channel, "At this point in time, it is premature to forecast how the S&P's U.S. credit downgrade will impact the real estate or mortgage industries.  Also signaling uncertainty is that Moody's and Fitch have stated that they have no immediate plans to change the U.S. credit rating. When the markets reopen this morning, there may be some insights, but again, at this juncture it's really tough to say."

As of today, S&P still has a Triple-A rating on Australia, Austria, Canada, Denmark, Finland, France, Germany, Netherlands, Norway, Singapore, Sweden, Switzerland, and the United Kingdom.

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