How a Government Shutdown Could Disrupt Home Sales

Other aspects of the real estate business, from mortgage lending to borrowing via government programs, could be disrupted as well.

If the NFIP lapses, home sales for which lenders require flood insurance could be delayed. The flood insurance program wouldn’t be able to issue new policies, increase coverage on existing policies, or renew existing policies, Fema said in an email. “Policies that are in force will remain in force and NFIP insurers will continue to pay claims under those policies during a lapse.” 

More information about the implications of a lapse in the program is available on the flood insurance program’s website.

A lapse in the coverage “would have a crippling effect” on Louisiana home sales, said Norman Morris, the chief executive officer of the trade group Louisiana Realtors. The impact in Florida could also be widespread, said Cyndee Haydon, an associate broker with the Tampa Bay-based Future Home Realty and the chair of the National Association of Realtors’ insurance committee.

“It’s easy to pick the Louisianas and the Floridas, but think of all the riverine communities across the country,” said Jim Tobin, the president and CEO of the National Association of Home Builders. Closings on properties located along waterways in which lenders require flood insurance could be delayed, he said.

The flood insurance program was created by Congress in 1968, and was last reauthorized in December 2022. While there have been attempts by members of Congress to reauthorize the program separately from a broader spending bill, it is likely that the flood insurance program will be bundled with a bill to avoid or end a broader government shutdown.

Not all home purchases require flood insurance. A 2017 analysis from the University of Pennsylvania’s Wharton School found that more than half of the flood insurance program’s policies were concentrated in roughly 1% of U.S. counties with high flood risk, like those in Florida, along the East Coast, and around cities such as Sacramento, Houston, and New Orleans. The National Association of Realtors estimates that 1,300 home closings a day could be affected.

That is relatively small in terms of the national real estate market. It is unlikely to disrupt mortgage stocks, said Bose George, a Keefe, Bruyette & Woods managing director covering mortgage finance companies—but home sales could slow in flood-prone areas, adding to the challenges local mortgage and real estate businesses face. 

Higher rates, stretched home affordability, and a short supply of homes for sale have already blunted mortgage volume, said Bill Killmer, the Mortgage Bankers Association’s senior vice president for legislative and political affairs. “This is just one more added complicating factor in an already difficult market,” he said.

A government shutdown could also delay closings using government-backed financing, such as loans from the Federal Housing Administration and the Agriculture Department, MarketWatch previously reported. 

“Most single family forward loans would be able to proceed, with the exception of loans requiring assessment by a HUD underwriter,” a Department of Housing and Urban Development spokesperson told Barron’s, adding that the department would be unable to endorse certain loan products, such as reverse mortgages or Title 1 home improvement loans. Both Ginnie Mae and the FHA, two government backers of mortgages, are part of HUD.

“VA will continue to process and deliver all benefits to Veterans – including compensation, pension, education and housing benefits,” the Department of Veterans Affairs said in response to an email from Barron’s. More information is available on the department’s website detailing its contingency plan. The USDA didn’t immediately respond to an email seeking comment.

Two of the large buyers of mortgages in the secondary market,

Fannie Mae

and

Freddie Mac
,

wouldn’t be directly affected by a shutdown. The government-sponsored enterprises back about 70% of mortgages, according to the National Association of Realtors.

“Freddie Mac will continue normal operations without interruption in the event of a federal government shutdown,” a Freddie Mac spokesperson said. “Freddie Mac is not a government agency and therefore not directly impacted by the shutdown.” Fannie Mae didn’t immediately respond to a request for comment.

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