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Recently, my fiancée and I took a road trip to Athens, Georgia, to introduce her to some Southeastern Conference football. Being a lifelong Georgia Bulldogs fan, there’s nothing better than a Saturday in Athens with a Creature Comforts Tropicalia in my hand. We ended up making the trip by car for two reasons. First, flying didn’t make much sense because Athens is about 70 miles outside of Atlanta. Second, we wanted to stop at Buc-ee’s in Florence, South Carolina.
Driving means listening to music, podcasts, or Sirius XM. After we got tired of music and podcasts, we listened to CNN for the rest of the trip. During the afternoon, CNN ran a segment on mortgage interest rates remaining high despite the Federal Reserve’s recent efforts to cut interest rates. Business reporter Roben Farzad explained that the reasons for stubbornly high interest rates were concerns about the potential inflationary policies of the incoming administration and budget deficits.
In November, the interest rate for a 30-year fixed mortgage was 7 percent. That was a substantial jump compared to the 6.26 percent rate in October. The good news is that the 30-year fixed mortgage interest rate decreased from 7 percent in November to 6.73 percent as of the week of December 9, ahead of another interest rate cut by the Federal Reserve.
When Congress runs a budget deficit—and is therefore forced to borrow money—the Treasury Department has to issue securities in the form of bills, notes, and bonds to finance that debt. Investors can purchase these securities. Treasury securities are generally considered a safe investment, offering a virtually guaranteed yield or rate of return to the investor.
As of December 13, the yield for a 10-year Treasury is 4.379 percent. The peak yield in the past five years was 4.92 percent in October 2023. Yields haven’t been this high since 2007. In the short term, yields may decline. In the long term, as yields rise to keep investors buying our debt to pay our bills, investors may wonder how safe of an investment Treasuries are. After all, Fitch Ratings downgraded the United States’ credit rating in August 2023 over concerns of “fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance[.]”
These are problems that won’t dissipate in the near future, considering that Congress may pass a border-related package that will include billions in new spending, extend current tax rates, and potentially pass new tax cuts that will reduce revenue. To be clear, Congress needs to address the border, the immigration system, and examine tax policies that will positively impact people’s lives. However, Congress must also consider the fiscal situation of the United States and find ways to reduce the budget deficit. Failure to do so will affect the lives of Americans looking to live the American Dream.
Congress Can’t Control Its Fiscal Profligacy
Most Democrats and Republicans are in denial that the United States is on a fiscally perilous trajectory. Every day is treated as though it’s business as usual. The focus of most in Congress is on anything but the fact that the United States’ fiscal house is built on sand, slowly being eroded by waves that are only getting larger.
Let me give you an example. The Congressional Budget Office keeps track of monthly federal spending. FY 2025 began in October, so we’re not even through the first quarter of the fiscal year. The budget deficit is already $622 billion. That’s $242 billion higher than the $381 billion budget deficit at the same point in FY 2024. What’s causing such a large deficit? Well, federal tax receipts are down by 7 percent. Part of the reason is that about $70 billion of individual and corporate tax revenue was shifted into FY 2024 because of postponed tax deadlines in 2023.
Federal outlays were also up 18 percent over the same time in FY 2024. The largest mandatory spending programs–Social Security, Medicare, and Medicaid–increased by 7 percent. This increase is primarily due to higher enrollment in the Healthcare Marketplace (the health insurance exchange created by the Affordable Care Act of 2010), and refundable tax credits rose by 46 percent, from $16 billion at the same point in FY 2024 to $24 billion. Net interest on the public’s share of the debt increased by 7 percent, from $152 billion to $163 billion.
In FY 2024, the federal government spent $949 billion on net interest. That’s more than Medicare, Medicaid, and the Department of Defense. Only Social Security benefits came in higher. Outlays for net interest are only expected to rise as Congress accumulates more debt due to its utter failure to take the United States’ fiscal issues seriously.
Look at it this way. In FY 2025, nearly 28 percent of federal spending–that’s $1.938 trillion–will be financed by debt. That’s based on the law as of June 2024. That doesn’t take into account anything that Congress has passed or will pass. About a quarter of federal spending will be financed through debt in FY 2026 through FY 2031. This, however, rests on the assumption that the Tax Cuts and Jobs Act expires and additional tax revenues come into federal coffers. The share of federal spending financed through debt will gradually begin to rise, even with those additional tax revenues, and climb back to 28.2 percent in FY 2033 when the budget deficit is projected to be $2.8 trillion.
The data from the Congressional Budget Office for the years after FY 2034 haven’t been updated since March 2024, but we know deficits and debt will grow larger. Eventually, 30 percent of deficits will be financed through borrowing.
The federal budget deficit is the sum of the primary deficit plus net interest. Primary deficits are projected to be relatively stable. Once net interest on the debt is factored in, the total deficit spirals out of control.
The share of the debt held by the public is projected to rise to $50.6 trillion in FY 2034. Every single dollar of the debt must be financed through the issuance of Treasury securities. That debt is periodically rolled over as well. This means some debt was sold under lower yields but has since matured. It will have to be reissued and resold to investors at higher yields.
Yes, Deficits and Debt Can Impact Interest Rates and What It Means for You
The lack of supply is one thing keeping home ownership out of reach for many Americans. There’s only so much Congress can do about supply issues. This is primarily a function of state and, in particular, local governments to address. We’ll note that a bill in Congress–the Yes In My Backyard (YIMBY) Act, H.R. 3507 and S. 1688–could have incentivized local governments to address some of the issues with supply, but it wasn’t a cure-all. Unfortunately, that bill failed to move to a vote in either the House or the Senate.
During the presidential campaign, Vice President Kamala Harris proposed a $25,000 first-time homebuyer tax credit. Although that sounded like a good idea, government subsidies tend to increase the price of what is subsidized. You only need to look at the cost of a college education and student loans to see how subsidies impact costs.
Interest rates are another problem with housing. Let’s say you want to live in an up-and-coming area with a good school district, but prices in the community are approaching $450,000. You put down the conventional 10 percent but still get stuck with a 7 percent interest rate. You’re looking at $3,200 per month once you factor in property taxes. If you go with an unconventional loan and are required to put only 3 percent down, you’ll pay roughly $3,600 per month.
But interest rates can complicate what you pay. There is a point at which the supply of securities will overwhelm the demand, and as a result, interest rates must increase to attract investors. As budget deficits and the national debt grow almost unchecked, investors may view Treasury securities as less safe. There is both supply pressure and risk pressure pushing interest rates ever higher.
There is a limited supply of funds for borrowing. Given the federal government’s ever-increasing borrowing needs, it competes directly with the private sector for available loans, resulting in increased interest rates for homes and other personal loans. This situation is currently unfolding. The key question is how long it will persist and if conditions will improve before they worsen.
Of course, there are other factors that contribute to interest rates, but the debt and deficits are major reasons we’re seeing mortgage interest rates remain high even while the Federal Reserve is cutting interest rates. Frankly, it’s insulting to every American that the political class in Washington, DC, continues to weaponize the issue of affordability while doing nothing to address the deficits and debt that are pushing interest rates higher and keeping people out of the American Dream.
