Think 6% mortgage rates are too high? Here’s how bad it could get if the U.S. defaults on its debt.

The real-estate company’s projections, released Thursday, come weeks ahead of the June 1 “X-date.” That’s the earliest date when the government could run out of its ability to pay all its bills and debt obligations if there’s no political deal to raise the government’s debt ceiling.

President Joe Biden and House Speaker Kevin McCarthy are scheduled to meet Friday to continue negotiations to raise the country’s borrowing limits.

Zillow says a default is “very unlikely,” a view shared by many political and market observers, despite the Washington D.C. gamesmanship. But as the X-date approaches, Zillow is adding to the projections of what Americans’ financial lives could look like in the wake of a default that hypothetically lasted one to two months, saying there would be a “deep freeze” in the market.

A 30-year fixed rate mortgage would peak at 8.4% in September if a default occurred, according to Zillow.

That would be approximately two percentage points higher than current rates. The 30-year fixed mortgage edged down to an average 6.35% as of Thursday, according to Freddie Mac
FMCC,
+0.69%.
A week earlier, the 30-year rate averaged 6.39%.

Mortgage rates tend to be linked with the yield on 10-year Treasury notes
TMUBMUSD10Y,
3.397%.
If Treasurys go from a safe haven to an asset with some default risk, or risk of a delayed payment, their price would go down and their yield would increase — pushing up mortgage rates, and all the other consumer and business financing that’s benchmarked against the Treasurys.

Rising risk in Treasurys would translate to rising costs for homebuyers.

Without a default, Zillow estimates an average mortgage payment of $1,701 in September. But if a default did occur, the typical September mortgage payment would climb to $2,079.

That’s a 22% increase in cost for homebuyers, the projection noted.

While a default would warp interest rates, Zillow said increased unemployment and economic uncertainty would also damage buyer demand.

All told, there would be 700,000 fewer existing home sales between July 2023 and December 2024, the projections noted. At the lowest point, there would be 23% fewer existing home sales in September, Zillow said.

A default would be a “self-inflicted disaster,” said Jeff Tucker, Zillow’s senior economist.

“It is fair to say that hundreds of thousands of prospective buyers would be pushed out of the market in this scenario,” Tucker said. Nearly half of home buyers last year were looking for their first home, he noted.

Read also: What happens if the U.S. defaults on its debt? How would it impact your savings, cash investments and 401(k)? Brace yourself.

Home values could drop 5% lower, the projections said. That might be a glimmer of comfort for homeowners. But it would be another barrier for buyers who faced steeper rates while prices didn’t sink.

Even though housing inventory has been slim and interest rates have climbed since last year, one gauge said there’s been more consumer optimism creeping into the housing market this spring.

In April, an ongoing Fannie Mae gauge of homebuyer sentiment said 22% of polled consumers were expecting mortgage rates to decrease, compared to 12% who felt the same way in March.

The Zillow projections echo other outlooks on what could lay ahead if the government can’t pay all its bills at least for a time — and rattle financial markets in the process.

“Treasury yields, mortgage rates, and other consumer and corporate borrowing rates would initially spike, until the debt limit is resolved [and] decline during the subsequent deep recession, but ultimately remain elevated as investors demand compensation for the risk of a future breach,” according to March research from Moody’s Analytics
MCO,
+0.13%.

The economy could lose 7 million jobs, and a stock-market selloff would erase $10 trillion in household wealth, the note said.

But all these projections are estimates based on what could happen. At Zillow, Tucker said there’s “much uncertainty” in the company’s estimates but “little doubt that a default would be a major negative shock to housing market activity.”

There are, however, other opposing views. Any default would have “no impact if it is only a short duration,” said Lawrence Yun, chief economist and senior vice president of research at the National Association of Realtors. A short length counts as “one week or even a month” and that “may be tolerated,” he said.

Investors know the U.S. is a country that “has the capacity to pay up, though there will be a bit of circus theatrics along the way,” Yun said.

During previous government shutdowns, federal workers “did not panic knowing missed paid checks will be recovered once the government was reopened.” 

Yun said “the same goes for debt default. I do not believe a missed interest payment will lead to panic, because investors understand they will be made whole once the debt ceiling is raised later.”

Others, including Treasury Secretary Janet Yellen, would beg to differ. Yellen has said “financial and economic chaos would ensue.”

Yun said he disagrees with Yellen on the short-term impact, he understands Yellen “wants to fulfill commitments.”

Zillow Group Inc. shares are up more than 45% year to date. The Dow Jones Industrial Average
DJIA,
+0.06%
is up 0.5% in that time and the S&P 500
SPX,
-0.01%
is up more than 7%.

Aarthi Swaminathan contributed to this report.