The U.S. flag and a sand timer running out.

What happens to real estate when the government shuts down? 

Housing market impacts could include mortgage delays, declining consumer confidence and — perhaps — a small dip in mortgage rates.

Updated September 29, 2023
4 minutes

Key points:

  • An Oct. 1 deadline is looming for lawmakers, and a shutdown could sideline millions of federal employees and government agencies.
  • A government shutdown is less harmful than a debt default — a crisis that was averted last spring — but could impact the economy if it drags on.
  • Mortgage rates could decline slightly if a shutdown causes the economy to cool, but the effects may be temporary.

While a government shutdown won't stop people from buying and selling homes, the ripple effects across the economy could be disruptive, especially if it drags on.

If lawmakers can't agree on how to fund the government before the Oct. 1 deadline — which is looking likely — millions of federal employees will stop receiving a paycheck during the shutdown and a variety of agencies will be idle.

Effects won't be major, but some mortgages could be delayed

The government agencies closely tied to the mortgage industry should only be minimally impacted, at least initially. Fannie Mae and Freddie Mac will continue operating because their operations are funded by fees from lenders. The same goes for the Department of Veterans Affairs when it comes to handling VA loans.

It was thought that the IRS would remain funded through the Inflation Reduction Act, but as reported by the Washington Post, a ruling this week made clear that is not the case. If the government shuts down, about two-thirds of the agency's workforce would be furloughed. That could stall prospective homebuyers, since operations like income verification for lending may not be available.

That could contribute to delays around mortgage loans, particularly if the shutdown isn't resolved quickly. Zillow estimates around 2,500 originated loans would be delayed per working day. Black Americans would likely be disproportionately impacted, because a higher percentage of their loans involve government agencies like the Federal Housing Administration and the Rural Housing Service, said Zillow Senior Economist Nicole Bachaud.

Hale noted that a shutdown could also delay mortgage loan approval for other reasons. In areas where flood insurance is required, for example, buyers could be stalled if the National Flood Insurance Program were to pause operations.

Shutdown vs. default

A shutdown is less dire than a default on debt, which was looming last spring and would have more directly impacted the housing market, said Chen Zhao, who leads the economics team at Redfin. She noted that with a government default, the question is whether the government has enough money to spend, while a shutdown is about how much the government should spend.

"The difference for economists is that … if [a default] had not been averted, it would have had catastrophic economic consequences," Zhao said. "Whereas with [a shutdown] … the economic consequences are actually really mild."

That's one reason why the U.S. has yet to default on its loans but has managed 21 government shutdowns in the past 50 years. The longest shutdown was also the most recent: In late 2018 and early 2019, the shutdown lasted for 34 days.

Consumer confidence could take a hit

The more direct impact of a shutdown could come from consumers. If millions of federal employees are not getting paid, they also aren't doing things like buying a house or making other major purchases, further slowing demand in the housing market.

And uncertainty caused by a shutdown, both among consumers and analysts, can cause other problems. Hale said it's "one more element that could lead to volatility in the mortgage and other financial markets, but is not likely to bring lasting change."

Zhao agreed that any effects will likely be temporary. "In the past few shutdowns, what we've seen is that consumer sentiment typically falls in the month that the shutdown happens, but then in the month that the government is back open it pops back up. So the impact is not long lasting," Zhao said. 

Mortgage rates could go down... a little

Ironically, a government shutdown could accomplish what the Federal Reserve has been trying to do for over a year: Cool off the economy. Zhao noted that Treasury yields usually fall during a shutdown, which would lead to lower mortgage rates. But, it could also lead to a recession, resulting in job losses.

During a shutdown, key economic data isn't being produced, which could lead to some tough choices for the Fed in November if the shutdown hasn't ended. With the absence of new data, Zhao said the Fed would most likely hold interest rates where they are.

And while a shutdown and potentially slower economy could, at least initially, cause interest rates to fall, no one should be expecting to see 5% mortgages.

Case in point: A decade ago, rates dropped from 4.5% to 4% leading up to the shutdown, but were quickly back to 4.5% after it ended.

"What that means is that mortgage rates would fall a little bit, but it's not going to be a game changer," Zhao said.

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