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By Suzanne Blake
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The National Association of Home Builders is warning that the housing market could face serious issues under the current government shutdown.
While the NAHB said, “in most cases, the short-run impacts of a shutdown on the housing sector will be minor,” they cautioned that the long-term effects of a shutdown could be significant, saying this could have “significant impacts on mortgage accessibility and reduce housing demand.”
Why It Matters
The Senate passed a spending bill to fund the majority of the federal government through September 30 of this year, but a partial government shutdown began at 12:01 a.m. on Saturday, January 31. And so far, it is unknown how fast the House will vote on the funding legislation passed by the Senate.
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This shutdown could influence various parts of the federal government, including the departments of Defense, Treasury, State, Health and Human Services, Labor, Housing and Urban Development, Transportation, and Education, according to the NAHB.
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Government Shutdown Vote
House Speaker Mike Johnson indicated on Sunday that several more days could pass before a government funding package is voted on. This means the partial federal shutdown is likely to continue into the week as Democrats and Republicans debate funding over the Department of Homeland Security (DHS).
The shooting deaths of two residents by federal immigration officers amid protests in Minneapolis have sparked a larger backlash across the country over funds for U.S. Immigration and Customs Enforcement (ICE). The Senate approved a bill to fund DHS for two weeks, after which Congress would need to make new funding decisions regarding ICE operations.
What Does a Partial Government Shutdown Mean?
Partial government shutdowns occur when Congress and the president cannot reach an agreement on funding for part of the federal government by a specific spending deadline.
At that point, government agencies stop nonessential activities until the funding is approved. This is what’s happening with ICE spending, and the ramifications could spill over into the housing market.
"A partial government shutdown is unlikely to freeze the housing market, but it does create friction in several parts of the home-buying and mortgage process," Anthony Smith, a senior economist for Realtor.com, told Newsweek. "Most core lending channels continue operating. Federal Housing Administration and Department of Veterans Affairs loans generally keep moving because they are either self-funded or supported by permanent authority."
“However, reduced staffing at the Department of Housing and Urban Development can slow approvals, inspections, and endorsements, potentially lengthening closing timelines," Smith said.
Impact on Housing Market
Housing demand and mortgage accessibility could both plummet if the partial government shutdown continues too long, the NAHB warned.
Specifically, the National Flood Insurance Program (NFIP) is of concern, as the authority to issue new flood insurance contracts expired during the government shutdown.
This will delay new home sales or insurance renewals for property owners with federally backed mortgages in a Special Flood Hazard Area. Ultimately, sales could be canceled even though flood insurance contracts entered into before January 30 will continue until the end of their policy terms.
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Previously, Congress reauthorized the NFIP retroactively for most lapses in authorization, the NAHB said, but “there is no guarantee that it will do so in this instance.”
“During a lapse in NFIP authority, federal banking regulators have issued guidance stating that lenders may continue to make loans secured by property in Special Flood Hazard Areas without requiring NFIP flood insurance, provided they complete flood hazard determinations, comply with applicable flood insurance regulations, and manage safety and soundness risks. This reflects a market adaptation that avoids the incredible disruption seen in past lapses when NFIP was unavailable,” Smith said.
Additionally, some homeowners are required to file IRS Form 4506-T to verify the mortgage applicant’s income and Social Security number. With the IRS shut down, mortgage application approvals could be suspended alongside other taxpayer services, such as refunds.
What People Are Saying
Michael Ryan, a finance expert and the founder of MichaelRyanMoney.com, told Newsweek: “This doesn't affect every buyer equally. Rural markets, flood-prone states, and FEMA zones take the gut punch first. A buyer in Arizona might not care. A buyer in Florida trying to close in a Special Flood Hazard Area is dead in the water, pun intended...Same with rural development loans through USDA. No new rural housing loans, grants or loan guarantees will be committed during a shutdown.”
Kevin Thompson, the CEO of 9i Capital Group and the host of the 9innings podcast, told Newsweek: “Continued shutdowns create uncertainty. Builders may slow construction in higher risk regions or pass that risk onto buyers. Either way, the end result is the same. Higher costs, reduced housing supply, and more pressure on an already strained housing market.”
Anthony Smith, a senior economist for Realtor.com, told Newsweek: “In the short run, impacts are mostly operational rather than structural. Buyers and sellers should expect, slower loan processing and underwriting, delayed inspections or environmental reviews and even possible closing disruptions in flood zones.”
What Happens Next
While there could be potential long-term consequences if the shutdown persists, Smith said effects should be minimal and largely limited to timing.
“If prolonged, several weeks or longer, the risks grow and could see effects such as larger processing backlogs, fewer government-backed loan endorsements, delayed closings and canceled transactions and tighter mortgage availability,” Smith said. “A short shutdown slows activity, while a long shutdown can begin to weigh on demand and affordability by increasing delays, uncertainty, and borrowing costs."
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