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Q: How does the downgrading of the nation’s credit rating affect real estate?

A: Standard & Poor’s recently gave notice that its outlook for the United States has turned negative. The agency maintained its AAA rating on the U.S., but it warned that there is at least a one-in-three likelihood the long-term rating could be lowered over the next two years.

The main culprit is the nation’s growing debt and discord in Washington over the budget. But nestled within S&P’s document explaining its rationale, the agency also cited outlays to mortgage giants Fannie Mae and Freddie Mac as a substantial risk, which was noted in a
DS News report.

“Additional fiscal risks we see for the U.S. include the potential for further extraordinary official assistance to large players in the U.S. financial sector, along with outlays related to various federal credit programs,” S&P reported. “We estimate that it could cost the U.S. government as much as 3.5 percent of GDP to capitalize and re-launch Fannie Mae and Freddie Mac, in addition to the 1 percent of GDP already invested.”

So far, Treasury has funneled $148 billion in taxpayer dollars to the two government-sponsored enterprises. S&P estimates that the government might have to inject up to $280 billion to cover losses at Fannie Mae and Freddie Mac. This includes the $148 billion already spent.

However, the agency suggests that financial support could ultimately swell to $685 billion if the government capitalizes Fannie and Freddie on a commercial basis. As a result, S&P analysts have downgraded their outlook on the long-term rating of the nation from stable to negative.

S&P first rated the United States “AAA” in 1941. Since that time, the U.S. government has maintained a “AAA” credit rating and a stable outlook, up until now.

Q: Are mortgage rates still falling?

A: Yes, mortgage rates continue to fall at this writing. Freddie Mac recently released the results of its Primary Mortgage Market Survey, which shows mortgage rates falling during the last week in April for the second consecutive week. The 30-year fixed rate stands at 4.78 percent; the 15-year fixed rate stands at 3.97 percent, the lowest since Dec. 9, 2010.

“Mortgage rates are following Treasury bond yields lower amid weak local economic data reports on business conditions and house prices,” said Frank Nothaft, chief economist for Freddie Mac. “Declining home prices and a high level of foreclosures continue to affect housing decisions. Between the third quarter of last year and the first quarter of 2011, the housing stock experienced a decline of nearly 400,000 homeowners, according to the Census Bureau.

“However, the National Association of Realtors reported that during the same period there were almost 700,000 first-time homebuyers, which suggests gross losses may have been closer to 1.1 million homeowners over the October through March time frame,” Nothaft said.

About the writer
Jim Woodard is a national real estate columnist who writes for Creators Syndicate, creators.com.