Because this is the first debt downgrade from AAA for United States Debt we are entering unchartered territory, but we can offer some clues on what to watch out for and how this could affect Main Street going forward.

Nobody I know would say a downgrade to US debt is a good thing; however there may be a silver lining after all.  First off, the downgrade was inevitable.  S&P telegraphed this downgrade and stated so much when they announced it would take $4 Trillion in deficit cuts to protect our credit rating.  Congress finally sent a bill promising around $1 trillion in cuts now, and other unnamed cuts later on.  The reality is we cut about $21 Billion from this year’s budget, which is at a deficit of around $1.6 Trillion, so it’s really a drop in the bucket.  We just added over $2 Trillion to the debt to get us through the next election.  Wall Street is concerned Washington isn’t serious about cutting costs, and who could blame them with fuzzy math like this?

10 Yr US Government Bond Yield Chart
United States Government Bond 10 Yr Yield

The blame game has begun with Democrats blaming the Tea Party for the downgrade.  This is kind of funny as it was the Tea party that pushed for cutting costs, something Standard and Poors said was necessary to protect the US credit rating.  So Congress dropped the ball and blamed the only people working towards a solution to protect our rating.  Washington doesn’t get it, and now they’re in recess.  The world gets it and they realize we’re flat broke.  We’ve spent and borrowed beyond our means and nobody wants to pay the bill.  Unless we change, we’re in for more downgrades.  Even Republicans have said “The Tea Party Won.  They changed the conversation from automatic debt increases to deficit reduction.”  And this is the problem with Washington.  It’s all talk.  They cut nothing.  All they did was change the conversation, and somehow that’s good enough for Washington.  This is the way it’s always been and that’s not good enough anymore.  Our debt is being downgraded.

Now, here comes the silver lining for local real estate.  Don’t take this as good news, because it’s not, but it’s not all bad like you hear in the media.  When there is uncertainty in the market, which there clearly is right now, investors seek a flight to quality, which as traditionally been the US debt.  We look good compared to many nations’ debt, so we’re still considered a leader, but our days are numbered.

Part of the flight to quality in uncertain times is seeking out tangible assets that have a value behind them.  Obviously one is gold, and another is real estate.  The difference is gold is just gold, but you can rent out or live in real estate.  You can actually derive an income from real estate.  Both can go up and down in value, but only one can provide a yield while you wait.

The other silver lining is investors worldwide have flocked to the 10 Yr Treasury note, as this is safer than the 30 Yr bond.  Today’s mortgage rates are closely tied to the 10 Yr note Vs. the 30 Yr bond, and as investors seek safety, the yield is going down making mortgages more affordable, for now.  30 Yr interest rates are down today to 4.375% with no points.

There is a hidden double whammy working in the real estate market’s favor right now.  Wall St is skittish, and this could all change on a dime.  The final silver lining could be that the S&P downgrade was a shot across the bow of politicians.  Perhaps if the American people speak out and tell their politicians we cannot continue living this way, they’ll have the political will to make necessary cuts.  America is still a great country, we just spend too much.  We have an opportunity to make these cuts voluntarily now, or we can wait until the markets do it for us like with Greece.  There were riots in Greece as the public wasn’t ready for the tough choices.  Let’s hope the American people are ready today and send that message to their politicians so we don’t have tough choices Forced upon us later on.

In the meantime, take advantage of low interest rates, low prices in Florida, and watch to see if investors take money out of the stock market and invest in real estate markets across the US.  Median prices have risen 30% locally, and with any luck we can keep that trend going. Of course, with any luck, Congress and the president will pass a real budget that pays the bills.  We can always hope, and maybe, just maybe, this downgrade will wake people up and address a situation that has gone unchecked far too long.  If not, there’s always church on Sunday.  Maybe that’s what they meant regarding separation between church and state.  And if that doesn’t work, watch where the smart money goes.

Washington may not be smart right now, but the money always finds the way.  Let’s just hope the money stays in the US and we remain relevant.  Stay tuned.

 

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