This fast-moving story will change quickly. Early on, there are a few ways that the Russian-Ukraine War is likely to have an impact on the U.S. residential real estate market. The two most probable and quickest are likely to be an increase in building material costs that is countered by a smaller increase in mortgage rates.
The conflict is being felt around the globe and soon in your neighborhood. Worldwide financial markets have already developed a serious case of the jitters. One day the financial markets are diving, and the next day brings a major rebound. That is dramatic uncertainty and financial markets do not like uncertainty. Pension funds, 401ks, stocks, cryptocurrency, and all monetary storage systems have become volatile. These are the primary places that homebuyers and investors withdraw funds to make property purchases.
The high-end real estate market for vacation and luxury homes is likely to be the first sector impacted. These purchases are easier to delay and draw a larger part of the financing from the volatile financial markets. However, real estate is a large purchase for buyers in all price ranges and the reluctance to pull the trigger will spread everywhere if the Russian-Ukraine War drags on very long.
Crude oil prices and inflation must be watched closely. Results from the upcoming March 15 and 16 meeting of the Federal Reserve have become even less certain. Inflation was expected to lead to higher interest rates by a quarter or half a percent. But rapidly rising crude oil prices will soon amplify inflation in every sector of the world economy. Higher transportation costs won’t only be felt at the gas pumps but will affect everything that is transported by land, sea, and air. Everything will become more expensive from the cost of 2X4s to build houses to the appliances for a kitchen remodel to the cost of toothpaste in the already remodeled bathroom. Crude oil prices will certainly increase home heating costs and are a further threat to the already fragile supply chain.
For the time being, lower mortgage rates appear to be a bright spot in the real estate market. Although inflation pressures are much higher, the immediate reaction by the mortgage market was to lower interest rates that had been steadily going up since the beginning of the year. This is mostly because jittery investors are moving money into the safer options of mortgage-backed securities, U.S. Treasury notes, and more secure corporate bonds. In light of everything else that is going on, this shifting of investment money has put downward pressure on mortgage rates. At least temporarily and possibly until the outcome is known from the March 15 and 16 meeting of the Federal Reserve.
What could prove interesting is that the effect could be felt on both the supply and demand side of the residential real estate market. High oil prices will fuel inflation. Inflation slows consumer demand and could eventually lead to a recession. The reality of war has already disrupted the stock markets. Potential homebuyers don’t know how much their investments are worth from one day to the next. Interest rates are also in question. Less cash for down payments and higher interest rates will lower the demand for homes. Higher costs for construction will slow new construction, which will further reduce the supply side of the equation. The conclusion could be that both supply and demand will shrink in the coming weeks. That can not be good for the residential real estate market as a whole. But there is more to come...
Last week, the Federal Reserve was leaning towards a substantial interest rate hike of 1/2 a percent. It’s now possible that the opportunity to slow inflation has been missed. The Federal Reserve may need to now get in front of inflation as the possibility of a global recession rears its head. The Fed fights a recession by lowering the interest rate. That would help support the demand for homes. A new level of importance has been added to the March 15 and 16 meeting of the Federal Reserve. It will signal whether the Fed intends to continue playing catchup with the changing economy or if it will try to get out in front of changes before they happen.
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