How Serious is the S&P Downgrade?

The downgrade of the nation’s credit rating by Standard & Poor’s is certainly not a good thing, but I don’t see it doing tremendous damage to the housing market or the market for short sales.

Its worst effect may be in prolonging the time it takes for us to finally start digging out of the pit we have been in for close to three years. The only good news here is that it shouldn’t make the pit any deeper.

Small increases in mortgage rates – which the “experts” say are likely out of all this – probably could be absorbed without major impact on traditional and short sales. After all, mortgages have been priced so low for so long, yet that hasn’t stimulated sales the way it should. So we think very minor upticks in mortgage rates are likely to have little effect.

Those experts were predicting even before this whole downgrade ruckus started that mortgage rates would be inching up later this year. So it might have happened anyway. However, it’s also true that mortgage rates tend to rise and fall along with U.S. Treasury bond yields. And a rush of investors into Treasurys, in the wake of the big market tumble on Monday, actually pushed those 10-year Treasury yields down slightly.

Unfortunately, this whole business has gotten much more difficult to gauge over the past three years, and predictions (including my own) are barely worth the paper they’re printed on. But I can say one thing with certainty, and that is that we absolutely need to avoid is a downgrade from either or both of the other credit rating agencies, Moody’s and Fitch. Right now, the attitude is that “well, it’s just one of them, and maybe they’re just plain wrong.” That tends to keep the fear and anxiety from getting out of hand.

But if we don’t get our financial house in order and keep it that way, and we see more downgrades, things could really get ugly. So regardless whether your preferred debt reduction approach is to reduce spending or to raise taxes, we have to convince Congress and the White House that at the very minimum, we cannot let debts and deficits get any worse.

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