Government Still Shutdown – 5 Impacts on Real Estate

As the government shutdown continues to drag on, how is commercial and residential real estate affected? What does Vail Resorts – the largest owner of ski resorts in the country – have to do with the government shutdown? Here's a guide with details on the top five impacts of the federal shutdown on real estate:

As we all know, the federal government is a behemoth, so the impacts from a prolonged shutdown will be felt far and wide. I'm going to focus on the following five areas: Government financing, conventional mortgages, flood insurance, commercial mortgages and property owners. It is also important to discuss the impact of the shutdown on government employees and what this means for the economy. 

1. GOVERNMENT FINANCING

The federal government is the largest mortgage lender in the United States including FHA, HUD, VA, ESDA, etc. During the shutdown, the loans are continuing, though questions are not being answered with reduced staff and loans delayed on average three to four weeks by some estimates. Ironically, there are no official estimates due to the government shutdown.

2. CONVENTIONAL FINANCING

More than 70 percent of all mortgages are backed by the federal government via Fannie Mae, Freddie Mac and Ginnie May. Lenders originate loans and then sell the loans to one of the government sponsored entities that then bundles the mortgages and resells the various "strips" in the secondary markets. Each of the three government-sponsored entities is a quasi-private enterprise with an explicit backing by the U.S. Treasury. Although during the shutdown, it appears the GSEs are continuing as normal with minimal impact on their funding, borrowers could have issues as lenders verify information from the IRS. The IRS is running on a skeleton staff, so as lenders request verification of taxes, W-2s, 1099s, etc., there will be delays. This will lead to further delays in conventional funding. 

3. FLOOD INSURANCE

To get a conventional loan on any property in a flood zone, the mortgage company requires flood insurance. The U.S. government is the primary issuer of flood insurance. Without it, properties can't be purchased or sold. Initially, the national flood insurance program refused to issue policies since they didn't have funding for staffing the program. A special bill was passed providing funding for FEMA and January 1, FEMA began issuing the policies at a delayed rate – three to four weeks out – due to the backlog.

4. COMMERCIAL MORTGAGES

The SBA is shutdown except for workers focusing on disaster services. The SBA lends 25.4 billion annually to small businesses. The SBA programs have come to a halt during the shutdown with no new loans being funded for small businesses. Furthermore, the SBA is the guarantor on countless loans that banks originate. The shutdown eliminates the review of any SBA guarantees as well. Small businesses throughout the country will be hurt by the lack of funding for their loans to expand, buy equipment, invest in infrastructure, etc.

5. PROPERTY OWNERS

With thousands of government workers no longer receiving paychecks, rent payments will be missed soon from government workers. Furthermore, Section 8 payments – low-income housing assistance – from HUD will not be sent, putting many low-income properties under financial duress.

Government workers could soon face eviction if the government is not reopened. Furthermore, many property owners with tenants that rely on governmental assistance will also be forced to make decisions for tenants to keep the lights on.

SECONDARY IMPACTS TO PROPERTY OWNERS

Along with direct impacts to property owners, there are countless secondary impacts. For example, let's say you owned a property outside of Rocky Mountain National Park that you rent nightly. With the park now closed, you likely are unable to rent the property. On the flip-side, let's say you owned an eatery close to a federal office – like the IRS or park service – with employees furloughed they aren't patronizing the eatery. Even as the government reopens, this is lost revenue that isn't coming back.

Not only will the shutdown impact purchases, refinances and owners of properties, government workers aren't getting paid. Government workers owe $400 million in mortgage and rent payments each month. Many of these payments will be missed to mortgage companies and landlords as the shutdown drags on. This could have long-lasting impacts on government workers even after the shutdown is lifted. For example, let's say a government worker misses a mortgage payment because they weren't paid. The lender would likely work with the borrower for a month or so. Unfortunately, this would still show a a late market on their credit and drop their score dramatically which would raise costs for government workers going forward. This same scenario will play out with various bills from utilities to credit cards to car insurance, etc., will all increase for at least the next 18 to 24 months. The rates will increase, and this could prevent many government workers from being able to purchase or refinance a home in the future.

WHAT DOES VAIL RESORTS HAVE TO DO WITH THE SHUTDOWN?

One of the byproducts of the shutdown is a hit to consumer confidence. As the shutdown continues, workers and businesses are not being paid or are unable to borrow money, this weighs on everyone's perception of the economy. Consumer and business confidence takes a hit and both pull back from spending, which further dampens the economic outlook.

This is where Vail Resorts comes into play.

The company does not have any direct impact regarding the shutdown, but it is a good proxy for consumer confidence. Vail Resorts caters to a higher demographic with ample disposable income. Nearly 60 percent of skiers and snowboarders earn more than $100,000 a year. This is a valuable group that has the expendable cash to spend and can indicate cracks in consumer confidence.

Vail Resorts has fallen 39 percent from its peak and recently fell 13 percent in one day. The CEO, Rob Katz, said "despite the good conditions, our destination guest visitation is much lower than anticipated in the pre-holiday period." By Vail Resorts reporting lower income and emphasizing less destination skiers are visiting is an important indicator that a very valuable group of consumers with disposable income is starting to worry about the future and is pulling back on expenditures like skiing.

The government shutdown will only perpetuate these fears.

A short-term shutdown typically has minimal impact on the economy. Our current shutdown is now more than 30 days old and will have substantial impacts on real estate from purchases to refinancing and existing property owners as paychecks continue to be missed. The longer the shutdown persists, the greater risk to the economy. Vail Resorts recent earnings announcement is a warning that consumers are getting nervous. The shutdown will, no doubt, perpetuate these fears; businesses and consumers will pull back from disposable purchases. How much consumers and businesses pull back is the questio. Unfortunately, we won't know the answer for a while as staff that handles government reporting of the economy is on furlough.