Now that the anticipated federal government shutdown is underway, the question becomes whether it will last long enough to further stall an already plodding housing market.

The first few days of a shutdown typically have little impact on homebuying and selling. In the case of this shutdown — the first since the record-setting 35-day shutdown ended in January 2019 — the drag on the economy would increase the longer that an estimated 750,000 furloughed federal employees, along with those still required to work, don’t get paid.

During previous shutdowns, politicians have often targeted the first military pay date as a reopening deadline, according to Chen Zhao, who leads Redfin’s economics research team. For the current shutdown, that would be Oct. 15.

“The immediate impact of a short, run-of-the-mill shutdown to both the housing market and financial markets would be minimal,” Zhao said. “But the ultimate impact depends on the length of the shutdown and which federal workers remain on the job.”

What will this mean for mortgage rates?

Mortgage rates could become volatile in the event of a lengthy shutdown. Rates typically drop over concerns that the economy is weakening before rising again once a shutdown ends.

However, rates could also increase if investors grow concerned about the credit quality of U.S. debt, said Melissa Cohn, regional vice president of William Raveis Mortgage.

For now, it’s “business as usual,” Cohn said, “but with delays on loans impacted by the shutdown, we’ll need to see what happens.”

The availability of government data could also impact mortgage rates. A key jobs report scheduled to be released on Oct. 3 will likely be delayed, along with other reports that the Federal Reserve uses to shape its monetary policy decisions. The next Fed meeting is scheduled for Oct. 28-29.

The current government shutdown had little initial impact on 30-year mortgage rates, with Mortgage News Daily pegging the rate at 6.37% on Oct. 1 — unchanged from one day earlier and around the same level as the few days prior.

The flood insurance problem

The National Association of Realtors has raised concerns about the National Flood Insurance Program (NFIP), the country’s largest flood insurance provider. The shutdown has led to a lapse in authorization, which could pose a problem in areas where flood insurance is required to complete a home sale.

Americans are currently unable to purchase new policies due to the shutdown, while current policyholders are unable to renew coverage.

NAR data indicates that the NFIP “is essential to 1,360 home sale closings daily, translating to approximately 41,300 affected monthly transactions nationwide.” Real estate transactions in flood-prone areas are expected to move forward without flood insurance, but this could become harmful to homeowners who have to deal with flooding during the peak hurricane season.

“Without access to flood insurance, American families must rely on federal disaster aid, which is severely limited,” NAR President Kevin Sears said in a Sept. 26 letter to congressional leaders.

Impact on the DC housing market

Given its concentration of federal employees, the housing market in Washington, D.C., is more exposed than other areas during a government shutdown. The region’s market had already weakened amid other government initiatives earlier this year, including Department of Government Efficiency layoffs, budget cuts and return-to-office mandates.

But those earlier changes haven’t translated to a major downturn in terms of price, according to Lisa Sturtevant, chief economist at Bright MLS. A lengthy shutdown might be the market’s tipping point.

“Although it is difficult to predict the extent of the impact, a prolonged government shutdown, or a shutdown that results in permanent workforce cuts, would lead to a slowdown in housing market activity and likely to year-over-year declines in home prices,” Sturtevant said, adding that the local market will likely rebound in the long term.

As the U.S. begins its first federal government shutdown since 2018, with uncertain repercussions for the economy, the ghost of Elon Musk continues to rattle real estate markets across the U.S.

Even though Musk left the government months ago, his legacy remains with DOGE. One of the ways in which DOGE has sought to cut government expenses has been to cancel leases of hundreds of offices across the country. While the DOGE website lists how much has been saved from each cancelled lease — in all, 384 cancelled leases at an estimated savings of roughly $140 million — experts say the savings come at a broader economic cost.

Cameron LaPoint, assistant professor of finance in the Yale School of Management, has studied the impact of DOGE closures on the commercial real estate market. LaPoint points out that the government, as a tenant, used to be a very safe bet. Because of that, their leases often included cancellation clauses that rarely were invoked — it was a goodwill gesture from the landlord that cost them little. Until now.

“If you and I are renting an apartment and cancel the lease, there is a penalty of several months’ rent,” LaPoint said. But when the government cancels a lease, the landlords are left high and dry. That is happening in cities large and small, rural and red, urban and blue. “A lot of private landlords are renting space out to government agencies, and they were counting on these agencies being in their space paying rent for five years. Now landlords have to find new tenants,” LaPoint added.

The savings DOGE touts, according to LaPoint, are largely based on the assumption that the government would have renewed the leases when they expired, but the DOGE numbers aren’t factoring in that some leases naturally wouldn’t be renewed due to normal government downsizing or relocations.

It may not seem like a few hundred lease cancellations could send a jolt through the country’s financial system, but lease cancellations do have a ripple effect. “The multiplication effects can be tied to thousands of loans across the country the way the commercial debt market works,” LaPoint said.

Government leases provide stable, predictable income that makes them attractive to lenders. When these “anchor tenants” disappear, it doesn’t just affect the buildings — it can destabilize the broader commercial lending market because banks package these property loans together into investment securities. That means problems with government-leased properties can spread risk across thousands of other loans nationwide.

A spokeswoman for the General Services Administration, which manages federal assets, said it has achieved notable results in a short time as it optimizes the federal portfolio, and estimated the savings to American taxpayers at $113 million.

When Feds Leave, so does financing linchpin, and confidence

“I’m seeing the effects of cancelled federal leases developing into a chain reaction in a number of markets,” said Alexi Morgado, realtor and CEO of Lexawise, based in Florida. “The availability of supply does not always lead to immediate demand, putting strain on operating income and building values, which can complicate financing.”

Of the 384 leases currently listed on the DOGE website for cancellation, the top three agency tenants are the Social Security Administration (23 leases cancelled), the Small Business Administration (22 leases cancelled), and the Geological Survey (22 leases cancelled).

The largest office to be axed by DOGE, according to LaPoint’s research, was a behemoth 845,000-square-foot office in D.C., with the smallest being a 250-square-foot Secret Service office in New York City.

The impact can be uneven by geography.

“In Florida, while the markets remain strong, we are seeing areas where reduction of public office space has placed additional pressure on landlords to reposition in the market and find other uses for space,” said Morgado, adding that some repositioning could include transforming empty office space into residential or mixed-use developments. “For agents like myself, it creates potential opportunities, but it is also going to require creativity and a far more strategic approach to repositioning space that could previously withstand whatever may come,” he said.

Mark Besharaty, senior vice president of commercial lending at California-based Arbor Financial Group, agrees that landlords of now-vacant government office space will need to get creative.

“To mitigate what I see happening in most cases, the owners of these properties will have to reconfigure the properties to fit a different kind of tenant base,” Besharaty said. Mitigation measures include subdividing larger government offices into smaller, more manageable parcels so other businesses can move in.

In the meantime, the closures will continue to ripple through the complex ecosystem that is the U.S. mortgage market.

“A lot of these larger properties where the owner has a loan is through a banking institution or CMBS [commercial mortgage backed securities], and they securitize the loans into an asset pool and sell them off,” Besharaty said.

When the property is empty, there could be a detrimental impact to the whole asset pool, which could cause the interest rates to be higher. “This is a national-scale issue, it’s not just D.C., it’s throughout the country,” he said.

Rural America may take a big hit

Rural properties with cancelled government leases face more acute risk because they typically aren’t included in those bundled loan packages, but that also means they have less financial cushioning when major tenants leave. Rural, less populated counties could also be at heightened risk of federal lease cancellations going forward.

LaPoint noted that among federal leases that are potentially on the chopping block because they are past their early termination eligibility date, 57% are located outside the 10 most populated states and outside of Washington, D.C. He also says that leases outside the biggest 100 counties are 63% of all leases currently eligible for termination, and represent 61% of the offices that have already received a letter from DOGE.

In the rural Upper Peninsula of Michigan, Michelle Hanley, mayor of Marquette, Michigan, says the IRS facility closure in her city will cause minimal pain because there has not been in-person service there since Covid.

“The bigger issue in the UP is the cuts made to the Bureau of Indian Affairs office in Baraga and the tribal health [center] in Sault Ste. Marie,” Hanley said. Indigenous people make up five times more of the area’s population density than in the lower peninsula and the mayor said the cuts would “hit hard.”

Tom Whalen, professor and department chair of business administration at Massachusetts College of Liberal Arts, says the whole issue of lease cancellation costs is nuanced.

“You could say it harkens back to John Maynard Keynes and his idea that the government can stimulate the economy through spending. Similarly, when the government withdraws funds from the economy, economic activity will contract,” Whalen said, and he added that there is a multiplier effect.

The Trump administration has threatened that more federal workers could be fired as a consequence of a shutdown. Office of Management and Budget Director Russell Vought told House Republicans during a conference call after the shutdown began that the Trump administration will carry out reductions in force among federal workers in one or two days, according to a person familiar with the matter. White House press secretary Karoline Leavitt confirmed during the briefing that she expected layoffs to begin “very soon,” possibly within “two days.”

Prediction markets are currently betting that the shutdown lasts two weeks.

“In the case of cutting leases, you have less money going to landlords and you have those organizations closing their locations. Thus, fewer people working in those locations. With lower rental income and the loss of jobs, there is lower economic stimulus,” Whalen said. “This has a ripple effect across the local economy.”