Forty Trillion and Counting: Massive U.S. Debt Is Already Impacting Deed Holders

The U.S. government’s debt appears to have reached escape velocity. It’s now passed the $40 trillion mark.

This year, we the taxpayers will pump $5.6 trillion in revenue into the Treasury. The federal government will spend about $7.4 trillion. For each dollar we send it, our government spends $1.33. Our lawmakers know this. The figures come from the Congressional Budget Office.

Our government has proved chronically unable to work within its means. Let’s ask a straightforward question. What does this portend for U.S. homeownership—and the true value of a deed?

Trouble at the Treasury

The U.S. government goes further into debt each year. This is because it spends more than it takes in taxes, and uses borrowed money to do that extra spending.  

Lawmakers and policymakers accept this, apparently thinking everything will just work out. After all, there are buyers—including big, powerful countries—always willing to keep investing in U.S. bonds. Right?

Maybe. Maybe not. Some of those major investors might need to sell those U.S. Treasury bonds. Stewardship of their own monetary system could require this.

Consider Japan. The United States has been working with Japan to try to keep the yen (Japanese currency) stable so Japan will continue to be a U.S. bond customer. (Japan’s national debt is even higher than ours—one of the rare cases.)

If major bond buyers drop off, the U.S. Treasury has serious problems. It signals rising risks for U.S. debt. The Treasury is pressed to pay higher interest rates to other parties that might be willing to invest in our debt.

Meanwhile, paying off the interest on this debt has become one of the largest forms of the U.S. government’s spending. The country is paying as much to cover the interest it owes as it pays to supply the Medicare system or national defense.

Link From Federal Debt to Household Budgets

As the Treasury pays higher rates, those rates reverberate through our economy. Indeed, for the first time since World War II, U.S. debt is now bigger than our country’s entire gross domestic product. In other words, we are not producing as much as we spend.

All this goes on in the background of our lives. Whether or not we keep abreast of the financial news, it makes itself felt in our daily experiences.

We feel it when it’s time to pay bills. The cost of living swells.

We continue doing our jobs and paying our taxes. But the services we’re used to, services we rely on, feel strained. That’s because our hard-earned tax money is going into interest payments for the government’s debt. Will there be sufficient support for expanding attainable housing, offering housing counseling, and so on? Or will the national debt erode that support?

Gradually, sometimes suddenly, our freedom takes a hit in conditions like this. Our dollars just don’t take us as far. Goods and services are more expensive to supply, because the companies that supply them have to pay higher rates for the funds they need. Businesses have a harder time budgeting for payrolls. The companies that are listed on the stock exchanges could see their value diminished. Retirement funds could droop.

And this is how, for a whole lot of people, it becomes harder to do what we need or want to do: buy a different home, accept a distant job opportunity, take on a caregiving role in the family.

Mortgage rates press up. This is because the interest rates on U.S. bonds (especially ten-year U.S. bonds) influence the interest rates that banks and mortgage lenders set. Mortgage rates are already nudging 7%. In addition, high levels of inflation generally push the price of a home upward.  

Deed Holders Are Already Paying for This

Research done at Texas A&M University shows the toll already taken on deed holders by the monstrous national debt. It has cost the owner of a median-priced home about $76K over the life of their 30-year mortgage. Here’s how.

When the federal government borrows money to finance the debt, it competes with other borrowers for available capital. What’s known as “capital demand” drives up interest rates on loans, impacting mortgage borrowers. The dynamic has pushed interest rates up by nearly 1%. That adds up to $2,500 extra annually—about $76,000 in the span of that 30-year mortgage.

The problem is much bigger than today’s heap of national debt. With debt now bigger than the entire U.S. economy, the federal government is going to have to keep building up ever more debt to finance its spending. And that is why we’re looking at a serious risk to the future stability of the housing market. To quote Texas A&M research author Jorge Barro:

The housing market crash during the Great Financial Crisis of 2008-09, for example, happened in part because slowly mounting leverage in mortgage markets went underappreciated until it reached a tipping point.

Similarly, writes Barro, with federal debt growth continuing to press long-term borrowing costs upward, unaffordability could reach a critical point that “could eventually trigger a significant downturn.” No reasonable person who recalls the crisis of 2008-09 would wish that on anyone.

What To Do Now

The national debt has been swelling for years. And recently, our debt has lurched upward. It is now on track to outpace the economy itself for years to come. This puts our collective financial future at risk.

If only we could see light at the end of this tunnel. But the overspending continues. And there’s little most of us can do to deal with the pickle our country’s finances are clearly in. That work is being done by groups like the Committee for a Responsible Federal Budget. We can get the facts from these groups and support them if inclined.  

We can do a few things to prepare for our personal futures. Consider that it may be best to choose fixed-rate debt and pay off variable-rate credit lines in times when rates are expected to climb. It’s certainly best to save money in household reserves in case a big-ticket budget need comes up.

Every household, and each of our readers, lives with a particular set of circumstances and needs. We cannot give individualized advice. Speak with a licensed financial pro if you’re making significant money moves for your home, your goals, or your estate planning.