Under the shadow of failed budget negotiations in Washington, D.C., the U.S. government officially shut down on October 1st, leading to concerns that the American housing market may face an “invisible standstill.” Processes for federal mortgages and insurance could slow down, tax verification could face intermittent delays, and transactions in flood zones could be delayed or halted due to the expiration of national flood insurance.
Meanwhile, official economic data will be delayed, causing uncertainty in loan pricing and transaction negotiations. Ultimately, the biggest impact of the government shutdown on the housing market is not on housing prices, but on the “stagnation of sales”! Let’s explore the major impacts of this U.S. government shutdown on the housing market.
The reason for the U.S. government shutting down again is that Congress failed to reach an agreement on a new budget bill before October 1st, or pass a temporary continuing resolution (CR)—the controversy centered around spending levels and whether to extend health insurance subsidies and tax deductions, leading to the automatic shutdown of government funds when they expired.
In fact, this is not the first time the U.S. government has shut down. The previous shutdown was from December 22, 2018, to January 25, 2019, lasting a record 35 days. In 2018 alone, there were three government shutdowns, with brief interruptions in January and February as well.
So, how will the government shutdown affect various aspects of the real estate market? The most immediate impact will be on the “feasibility of transaction processes and financing,” including mortgage approvals, insurance, verification, official data, all of which could be delayed or stalled, causing delays or even cancellations of cases that would have otherwise gone through.
Simply put, anything related to market transactions and federal subsidies or funding is likely to be affected. Federal programs such as Federal Housing Administration (FHA), USDA loans, and certain HUD projects will see a decrease in approval, guarantees, and processing speeds; while VA loans can still be processed, manpower shortages may lead to delays.
To cope with the government shutdown, on Wednesday, October 1st, Fannie Mae and Freddie Mac outlined alternative procedures for mortgage lenders to follow when gathering standard employment or income verification documents. Due to staff shortages during past government shutdowns, some mortgage lenders struggled to obtain income verification from the IRS, resulting in delays in approving loans for borrowers.
As the IRS has implemented new automated processes that exempt income verification services during shutdowns, it is expected that this issue will not arise this time. However, to prevent unforeseen issues, Fannie Mae stated that as long as borrowers fill out and sign the IRS tax transcript request form (Form 4506-C), lenders do not need to obtain complete tax transcripts before closing.
Nevertheless, if the borrower does not have recent tax returns, the lender still needs to obtain certain IRS documents, such as an electronic filing transcript or confirmation of no tax return record from the IRS. Lenders will receive complete tax transcripts from the IRS within 90 days after the transaction closes, even if there are delays in processing the requests, ensuring that most regular loan approvals can proceed smoothly.
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In terms of insurance, the National Flood Insurance Program (NFIP) is particularly affected as a “federal program” subject to both “authorization and appropriations” constraints. With the government shutdown, an “authorization interruption” and “funding cutoff” situation could occur simultaneously, leading to an immediate ban on issuing new policies or increasing coverage under NFIP. However, private market products such as homeowners insurance and earthquake insurance do not rely on federal appropriations, so they will continue to be underwritten.
For properties located in Special Flood Hazard Areas (SFHA) and financed with federally regulated or endorsed loans, lenders must have valid flood insurance (NFIP or a private flood policy that meets the requirements) for loan origination, renewal, increase, or refinancing processes. If NFIP ceases to issue new policies, it will directly impede property transfers and refinancing.
According to reports from realtor.com, homeowners with existing policies will be protected until the policy expiration date, as long as FEMA has sufficient funds to continue processing claims. The critical issue is that with hurricanes and floods peaking now, if flood insurance is interrupted, the real estate market will face a period of heightened uncertainty.
According to the Insurance Information Institute, during its peak in 2009, the National Flood Insurance Program covered over 5.7 million policies. By 2021, this number had dropped to 4.95 million, as private insurance companies began increasing their market share by offering more comprehensive coverage at higher premiums.
Shannon McGahn, Executive Vice President and Chief Advocacy Officer of the National Association of Realtors (NAR), stated, “NFIP supports nearly 500,000…