Sep 235 min read

#12 Politics in Real Estate: The Impact of Government Shutdowns on the Housing Market

Updated: Sep 25

A government shutdown occurs when Congress fails to pass appropriations bills to fund federal agencies. During a shutdown, many government services are either paused or scaled back, causing delays and disruptions in several sectors, including the housing market. In the context of real estate, a shutdown can have a significant impact on government-backed mortgages, permits, and transactions reliant on federal agencies like the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), and U.S. Department of Agriculture (USDA). With the 2024 election on the horizon, the possibility of election-related gridlock causing a shutdown is very real, and homeowners, buyers, and sellers need to understand how this might affect their plans.

1. How Government Shutdowns Affect Real Estate

Government-backed mortgages play a crucial role in the housing market, particularly for first-time buyers, veterans, and low-income households. When a government shutdown occurs, the agencies responsible for processing these loans often face delays or are completely suspended, leaving prospective homebuyers in limbo.

Common Real Estate Impacts:

Delays in Mortgage Processing: Agencies like the FHA, VA, and USDA may scale back operations during a shutdown, delaying the approval of government-backed mortgages. Homebuyers dependent on these loans may face weeks of delays, potentially missing out on purchasing homes or experiencing costly rate lock extensions.
Permit Delays: Real estate developers and builders who need permits from federal agencies, such as environmental or land-use permits, may find their projects halted during a shutdown. This can delay the completion of housing developments and affect the overall housing supply.
Confidence in the Market: Government shutdowns create uncertainty, which can affect buyer confidence. Potential buyers may hold off on purchasing a home until the government is back in operation, reducing demand in the housing market.

Example:

During the 2018-2019 government shutdown, the longest in U.S. history, many homebuyers saw delays in obtaining FHA loans. While some FHA workers were available to process loans, a backlog caused by the shutdown delayed mortgage approvals for weeks. In addition, IRS verification services were suspended, impacting buyers who needed tax documents verified as part of their mortgage applications.

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2. Democratic and Republican Approaches to Government Shutdowns

The debate over government shutdowns often comes down to fiscal policy and government spending, with Republicans and Democrats taking different approaches to avoiding or handling shutdowns.

Republican Approach:

Reduced Government Spending: Republicans tend to push for spending cuts and smaller government. During budget negotiations, they often call for reductions in discretionary spending, including cuts to social programs, which can lead to stalemates with Democrats.
Limited Shutdowns: While Republicans often favor reduced government size, they typically push for shorter or more limited shutdowns when gridlock occurs, preferring to focus cuts on non-essential services.

Democratic Approach:

Increased Government Spending: Democrats usually advocate for increased government funding for social programs, healthcare, and housing support. They argue that federal investments are necessary to support economic growth, housing, and infrastructure.
Shutdown Resistance: Democrats generally oppose shutdowns, focusing on keeping government agencies funded.

3. City Examples of Government Shutdown Impact on Real Estate

Washington, D.C.

As the seat of the federal government, Washington, D.C. is hit particularly hard by government shutdowns. Real estate transactions dependent on FHA and VA loans see delays, and thousands of federal workers are furloughed, leading to reduced consumer spending and market stagnation. During the 2018 shutdown, many D.C. residents found themselves unable to close on homes due to delays in mortgage processing.

Phoenix, Arizona

Phoenix has a large population of veterans who rely on VA loans to purchase homes. In the event of a shutdown, veterans in cities like Phoenix may experience delays in obtaining VA-backed mortgages, limiting their ability to enter the housing market. The city experienced this firsthand during the 2013 and 2018 shutdowns.

Miami, Florida

In Miami, a city with a booming housing market, government shutdowns can slow real estate activity due to delays in FHA and USDA loans. The city also has a significant number of low- to middle-income buyers who depend on these loans, leading to a slowdown in housing sales during shutdowns.

San Diego, California

San Diego has a large military presence, and shutdowns can disrupt housing transactions for military families relying on VA loans. During the 2013 and 2018 shutdowns, many homebuyers experienced delays in loan approvals, forcing them to delay or cancel transactions.

4. Broader Implications for the Housing Market

A government shutdown can have broader implications for the housing market as a whole. Consumer confidence tends to drop during a shutdown, as uncertainty around jobs and federal services increases. Potential buyers may hesitate to make major financial commitments like purchasing a home, leading to reduced demand and price stagnation in some markets.

Example of Broader Impact:

During the 2013 government shutdown, housing sales across the country dropped significantly as buyers postponed purchases due to delays in mortgage approvals and concerns over federal services. This resulted in a temporary slowdown in real estate transactions, which took several months to recover.

The Housing Market and Government Shutdowns in the 2024 Election

As we approach the 2024 election, government shutdowns remain a key concern, especially for homebuyers relying on government-backed mortgages.

Republicans and Democrats continue to clash over spending priorities, and election-related gridlock could result in further disruptions to the housing market. Understanding the potential impacts of a shutdown can help homebuyers, sellers, and real estate professionals plan for delays and challenges during these periods.

Disclaimer:

This post is for informational purposes only and does not constitute financial or legal advice. Government shutdowns can affect real estate transactions differently depending on location and individual circumstances. Homebuyers and sellers should consult with real estate or mortgage professionals to understand how a government shutdown might impact their specific situation.