How Government Shutdowns Impact Real Estate: What Buyers, Sellers, and Agents Need to Know

When Congress fails to pass funding legislation and the federal government shuts down, the ripple effects extend far beyond Washington, D.C. The real estate industry, which comprises nearly 20% of the entire U.S. economy, faces significant challenges during these periods of uncertainty. Understanding these impacts is crucial for buyers, sellers, and real estate professionals navigating transactions during a shutdown.

The Immediate Threat: National Flood Insurance Program

One of the most critical concerns during a government shutdown is the lapse of the National Flood Insurance Program (NFIP). This program, which supports nearly half a million home sales annually and contributes $70 billion to the U.S. economy, cannot sell new or renewal insurance policies when authorization expires.

During a lapse, existing NFIP policies remain in effect until their expiration dates, and claims continue to be paid until funds are depleted. However, buyers face significant complications. They may be unable to obtain coverage before closing, creating uncertainty about whether their home will be covered retroactively once NFIP is reauthorized. While most lending regulators suspend the flood insurance requirement during a lapse, allowing sales to proceed without coverage, this creates substantial risk if flooding occurs during the gap.

To avoid complications, industry experts recommend that buyers secure NFIP coverage well before any potential expiration date or consider private flood insurance alternatives. Even minor flooding can cause significant damage, and claims can only be paid while funding remains available.

Mortgage Processing and Federal Loan Programs

The impact on mortgage lending varies significantly depending on the type of loan and the length of the shutdown.

FHA Loans

The Federal Housing Administration typically continues endorsing new single-family mortgage loans during shutdowns, though with reduced capacity. Critical operations such as claim payments, mortgage servicing, loss mitigation, and REO property management generally continue, often through contractors. However, certain activities requiring direct staff input face suspension or significant delays. The FHA Resource Center remains open but with limited staffing, leading to longer wait times and restricted support for case-specific questions.

Past shutdowns have demonstrated that thousands of people trying to buy a new home or refinance an FHA-insured mortgage may be put on standby, with processing and approvals experiencing significant delays due to furloughed employees.

VA Loans

The Department of Veterans Affairs continues to guarantee home loans during government shutdowns, and lenders may keep processing applications. However, reduced VA staff and support functions may slow down approvals, appraisals, and certificate of eligibility requests. Veterans seeking a new loan or refinance should check with their lender for updated processing times during an extended shutdown, though short-term shutdowns typically cause minimal impacts on VA lending.

USDA Rural Housing Programs

Rural housing programs face complete halts during shutdowns. The U.S. Department of Agriculture stops issuing new direct and guaranteed home loans, and any scheduled direct-loan closings are postponed. While pending conditional commitments for guaranteed loans continue to be reviewed, closings for guaranteed loans without a guarantee proceed only at the lender's risk. Disbursements on existing construction loans may continue, but only when necessary to protect USDA's property interests.

GSEs and Tax Verification Challenges

Fannie Mae and Freddie Mac typically continue normal operations during shutdowns since they don't rely on appropriated funds. However, several complications arise:

Tax Transcripts: The IRS suspends the issuance of tax return transcripts during past government shutdowns, creating challenges for mortgage verification. Freddie Mac requires all borrowers to sign a 4506T request form before closing, though it doesn't need to be processed beforehand. Fannie Mae has similar requirements unless income can be verified through its proprietary Desktop Underwriter verification system.

Employment Verification: For home buyers employed by the federal government, both Fannie Mae and Freddie Mac allow verification of employment to occur after closing but prior to loan delivery.

Small Business Administration Impacts

During a shutdown, the SBA stops processing new loans and approving routine small-business loans. This can have cascading effects on real estate investors and commercial property transactions. However, the agency continues to close previously approved CDC 504 Loans and carries out limited loan servicing and liquidation activities. The SBA also continues to issue disaster loans should the need arise.

Housing Counseling and Public Housing

Housing counseling agencies may operate only if they've already received grant funding and have sufficient cash flow. Otherwise, services may be scaled back or paused, as new grants and payments are frozen unless deemed emergency-related.

For Housing Choice Voucher holders, assistance payments proceed under current commitments, but new funding approvals and voucher issuances face delays. Extended shutdowns create financial strain for Public Housing Authorities, potentially impacting both landlords and tenants.

Commercial Real Estate Considerations

Government shutdowns create unique challenges for commercial real estate. Data collection halts, causing uncertainty for dealmaking and hitting investor confidence. Retail and hospitality sectors see the quickest impact because they're entirely consumer-driven. Additionally, government office lease cancellations and federal workforce reductions can significantly impact commercial real estate markets, particularly in areas with high concentrations of federal employees.

Historical Context and Member Impact

The longest government shutdown in U.S. history lasted 34 days from December 2018 through January 2019. A survey of National Association of REALTORS® members during that period found that 75% reported shutdowns did not affect their contract signings or closings. However, 11% reported an impact on current clients, and another 11% reported an impact on potential clients.

The 2018-2019 shutdown delayed over $2 billion in loans to small businesses according to Moody's Analytics, demonstrating the broader economic impact beyond residential real estate.

Looking Ahead: Market Uncertainty

Economists warn that prolonged government shutdowns or those resulting in permanent workforce cuts would lead to a slowdown in housing market activity and likely year-over-year declines in home prices. The uncertainty created by shutdowns can heighten economic concerns and delay housing market rebounds, even if immediate impacts on individual transactions remain limited.

What Real Estate Professionals Should Do

The National Association of REALTORS® recommends that real estate professionals:

1. Stay informed about federal agency operations and contingency plans
2. Maintain close communication with lenders about processing times and potential delays
3. Advise clients to secure flood insurance coverage well in advance
4. Inform buyers and sellers about potential complications with government-backed loans
5. Consider alternative financing options when government programs face disruption
6. Maintain flexibility in transaction timelines to accommodate potential delays

Conclusion

While short-term government shutdowns may cause limited disruption to most real estate transactions, extended closures create cascading effects throughout the industry. From flood insurance lapses to mortgage processing delays and commercial real estate uncertainty, the impacts touch every corner of the market. Real estate professionals who stay informed, communicate proactively with clients, and plan for contingencies will be best positioned to navigate these challenging periods.

The real estate sector's significant contribution to the national economy makes it particularly vulnerable to government dysfunction. As lawmakers face future funding deadlines, the industry continues to advocate for stable, predictable government operations that support the millions of Americans seeking to buy, sell, or finance homes.

Sources:

• National Association of REALTORS® (NAR)
• CNBC
• CBS News
• Citizens Bank
• Mortgage Professional America
• National Association of Home Builders (NAHB)
• Real Estate News