Last Friday, Moody’s Ratings downgraded the U.S. sovereign credit rating from Aaa to Aa1. As a result, Treasury yields surged Monday morning, with the 10-year note jumping to 4.53% and the 30-year bill surpassing 5%. The S&P 500 fell by about 50 points, and the Nasdaq dropped 1.3%.
While Moody’s downgrade certainly isn’t surprising, it’s another stream of gasoline lighting an ever-engulfing firestorm of economic news this year, and it’s something worth talking about. Of course, with any piece of news like this, there is the potential for a cascading effect through the various markets, including real estate.
So, What is a Sovereign Credit Rating, Anyway?
You should think of America’s credit rating like your personal credit score. TransUnion (Fitch) and Experian (S&P) were already rating us at an 825, but Equifax (Moody’s) just dropped us from an 850 to an 825.
That matters a lot because it’s a measure of risk. Your credit score is simply an assessment of how risky it is to lend to you. At 850, a creditor will offer you the best interest rates because you are essentially a perfect borrower who poses virtually no risk of default.
If you had a 550 score, however, then the creditor would take a great deal of caution in working with you, if at all, and most certainly charge you the highest interest rates in order to get more of their money back quicker.
Now, for a country like the United States, similar logic applies. The U.S. Treasury issues debt in the form of Treasury bonds. These bonds don’t pay a lot in interest, but they’re considered very safe. A 10-year Treasury bill in good times will pay maybe 3%-4%, but typically, the yields are lower when the economy is doing well because investors feel like they can make more money in other assets like stocks. When times are bad, investors flock to T-bills to protect their money, driving yields up. It’s a supply-and-demand equation.
But with the latest downgrade from Moody’s, it’s suggesting, “Hey, maybe the U.S. isn’t as trustworthy as it used to be.”
What’s Behind Moody’s Downgrade?
Moody’s blamed “political dysfunction” and a ballooning deficit driven by entitlement programs like Medicaid, Medicare, and Social Security, as well as a growing share of spending going toward interest payments.
The real culprit, as I will never fail to point out, is Congress. They spend too much, fight too often, and have no real plan to fix any of it. The U.S. deficit has topped 6% of GDP for two years in a row. For context, the only times in the last 100 years when the deficit has made up 6% or more of GDP was during World War II, the Great Recession, and 2020, when COVID-19 struck.
Today, we just casually spend that amount.
Is it a Big Deal?
As a reaction to the news, 10-year Treasury yields have spiked to 4.5%, while 30-year yields came in above 5% for a period. Meanwhile, the S&P 500 fell 0.5%, the Nasdaq slid 0.7%, and even heavyweight blue chip stocks like Apple and Walmart were dragged down.
So, does the downgrade matter?
Sort of. Let’s be clear: Moody’s didn’t reveal some shocking new information. Everyone already knew the U.S. runs a massive deficit and that the political climate was dysfunctional. We’ve known this for years.
But that’s not the point.
Markets are forward-looking, yes. But they’re also sensitive to narrative shifts, as we have been painfully reminded of last month. If all three major rating agencies now agree that the U.S. doesn’t deserve a perfect score, that’s not just a technical change—it’s a message. One that could ripple into higher borrowing costs, jittery bond markets, and more caution from foreign investors.
This is where things get tricky. In theory, a lower credit rating should make it more expensive for the U.S. government to borrow money. Higher yields = higher interest payments = more strain on the budget.
But in practice? U.S. Treasuries are still the safest asset around. When things go south globally, investors still buy U.S. debt. Investors continued to invest in the United States even after S&P downgraded our rating in 2011. They continued to invest in 2023 after Fitch’s downgrade. The question is whether investors will continue to do so, and the answer to that is yes, but at some point, we’ll have to stop taking that for granted.
To paint my point, I think in the case of 2011, we were coming off a major recession that was global. On a comparative basis, the U.S. was a far safer place to keep your money than any other country. But today, we’re five years removed from a pandemic-induced recession, two to three years after a great inflation wave, and a surprisingly resilient job market. Most economies are doing fine, including ours.
So why would our credit rating get dropped now?
For one, the other two rating firms had dropped us several years back, so this is just Moody’s catching up. Two, I think it has to do with the latest turmoil over the tariff situation and some of the news about further tax cuts coming down the pipe that could make the deficit even more stark.
And finally, combined with general political instability and the fact that the BRICS nations are exploring de-dollarization and a stronger-than-2011 China, which, despite its upside-down population pyramid and latest economic woes, presents a greater challenge to the United States as a global power than ever before, I think it’s safe to say that the rating drop is an example of the U.S. being held to a higher standard in a world with more parity.
Is it the end of the world? No. Does it change life today? No. Could it change life tomorrow? Doubtful.
But is it a message? Yes. Should we listen? Probably.
What About Real Estate?
At this point, what doesn’t have an impact on the housing market?
The most obvious impact here is mortgage rates. Your typical 30-year fixed rate is tied to the 10-year Treasury yield, which, as I said earlier, just spiked. So long as that remains elevated, you’ll continue to see mortgage rates circle that 7% number.
As for the other segments of the market, it just adds another layer to the narrative that the sky is falling. Consumers are pulling back on spending, GDP growth is negative for the first time in a few years, the tariff situation last month did not help with overall economic confidence, the Fed doesn’t seem likely to make a move on rates anytime soon, and as a result, you’re seeing more and more would-be buyers hold off from buying a property.
Not just because it’s still expensive but because they, too, like any smart investor, don’t want to buy at the top of the market when they feel like the floor is about to fall out from under them.
Do I expect a housing crash? Not at all. But to any bystander who isn’t as grossly invested in real estate data as I am, my colleagues at BiggerPockets, or you—real estate is always one foreclosure away from mass hysteria.
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