Waking up to the news of the Russian invasion of Ukraine was devastating, and we were saddened to see videos of missile strikes and photos of battles igniting across the country. We want to take a moment to address how the conflict on the other side of the world could impact the U.S. housing market.
The escalating conflict in Europe will make the global economy weaker, resulting in opposing pressure on mortgage rates: The Federal Reserve fighting inflation is pushing rates up, while the conflict is pulling them down. Even with uncertainty and economic volatility, our most recent housing-market outlook–which predicts slowing sales volume and price growth, as well as small mortgage-rate increases throughout the year–is unchanged.
Financial uncertainty is slowing the rise in mortgage rates, with the average 30-year fixed mortgage rate sitting at 3.89% in the week ending February 24. That’s down slightly from the 3.92% peak the week before, but up from roughly 3.1% at the beginning of the year.
Pumping the brakes on rising mortgage rates could help homebuyers by making monthly payments slightly smaller than they otherwise would have been.
Global markets don’t like conflict and investors don’t like uncertainty, which means the financial markets are volatile and weakened.
That impacts the housing market because many homebuyers rely on selling stock or tapping into their 401(k) for a down payment, which is especially true as rising home prices increase the amount of cash necessary for a down payment. This will have a particularly big impact in expensive tech hubs like the Bay Area, Seattle and Austin.
Volatility in the financial markets may also erode consumer confidence around the U.S., which already fell earlier this month.
Oil prices spiked 7% initially to more than $100 a barrel, and rising energy prices is one of the biggest drivers of this year’s record-setting inflation. That’s relevant to the housing market in several key ways.
First, rising energy prices can prolong inflation, which means the Fed has more reason to fight inflation by increasing rates, which could further push up mortgage interest rates and slow homebuyer demand.
Second, increasing gas prices can ripple through the economy quickly. As President Biden said yesterday, “defending freedom will have costs for us.” Moody’s Analytics estimates GDP growth will be half a point lower than previous predictions in the third quarter of this year as a result of rising gas prices. That could lead to weakening job growth, limited pay raises and Americans having less money to spend on homes.
Finally, homebuyer demand for commuter exurbs typically declines when oil prices spike, though that effect may be less pronounced in the era of remote and hybrid work.
Russia’s economy is suffering in the wake of the attacks, with its stock market dropping, currency depreciating and threats of sanctions. That could impact the desire and ability of Russian homebuyers to purchase properties in the U.S.
Russians have historically purchased a fair amount of property in the U.S., specifically South Florida.
With the impact of Russia’s attack on Ukraine in mind, our most recent housing-market outlook remains unchanged. The forecast is relatively conservative. It shows total home sales slowing to 6.6 million by the end of 2022, sale-price growth slowing to 5%, and continued yet smaller increases in mortgage rates throughout the year, eventually reaching about 4.3%.
Here are some highlights of the most recent housing-market data, which shows strong but stabilizing homebuyer demand:
We will continue to keep an eye on the Russia-Ukraine conflict and its impact on the U.S. housing market.
