US home prices could plunge with mortgage rates topping 7% if a debt default even appears likely, Moody's chief economist says

• The housing market will come under stress if the US even appears to be headed for a debt default, Moody's Mark Zandi said.
• Home prices would slide and the the 30-year mortgage rate could surge past 7%, he said.

US home prices will suffer a steep drop, while mortgage rates shoot back above 7%, if the US Treasury defaults on its debt – or even appears like it might, according to Moody's chief economist.

In an interview with Fortune, Mark Zandi stressed the housing market is one of the parts of the economy that's most vulnerable to the risk of the US failing to meet its payment obligations.

Such a adversity – or even the likelihood of a default – could push the 30-year fixed mortgage rate above 7%, Zandi said. The rate averaged 6.89% as of Monday, according to Bankrate.

Worries that the US could default on its debt are mounting rapidly as a months-long political deadlock over the government's borrowing limit continues. Lawmakers have been unable to break the impasse even though the Treasury is set to run out of money by June 1 if the $31.4 trillion ceiling isn't lifted by then.

According to Zandi, risks of a debt default would be a big blow to homebuyers and sellers who are still reeling from the effects of the Federal Reserve's aggressive interest-rate hikes – and its effect on mortgage rates.

It could also threaten to worsen national housing affordability levels, Zandi told the outlet.

The US housing slump is already underway, according to the National Association of Realtors. In the first quarter, 31% of US housing markets experienced declines. That the highest in 11 years and up for 11% of markets that saw price declines in the last quarter of 2022.