Obama's Budget May Save the Housing Market

With the federal budget deficit at its highest point since World War II, President Obama is expected to unveil his deficit-reduction plan this afternoon at George Washington University.

These reforms are likely to have a major impact on the U.S. economy and the housing market in particular. Over the past few months, the Federal Reserve has offered a brighter outlook for economic recovery, but there are continued concerns over the current housing environment.

To counter the high deficit, Americans will likely see high inflation. This inflation will reduce the real value of the deficit. However, high inflation prompts demands for higher returns to compensate for their money-value loss, causing interest rates to rise.

Although real estate values are influenced by the supply and demand for properties in a given locale and the replacement cost of developing new properties, these higher interest rates may cause home prices to decrease. This can cause more homes to have mortgages that are considered underwater, or those in which the mortgage is worth more than the home.

In such instances, it makes little sense for home owners to continue making payments, which may lead to more abandoned homes.

When interest rates rise, borrowing for floating-rate home-loans becomes more expensive.