The current war in Ukraine is very concerning—for numerous reasons. Russia and Ukraine have been fighting since 2014. Back then, Russian President Vladimir Putin got the better of Ukraine and annexed the Crimean Peninsula in the name of “liberation”.
Putin now insists that he’s liberating Ukraine again, a nation he believes is truly a part of Russia and should have never been allowed to split off from the former Soviet Union after its dissolution in the early 1990s.
But this time, the Russian advance has been slowed significantly. Not only has the Ukrainian military and civilian population shown fierce resistance to Russian occupation, but the international community has come together to condemn Russia and impose severe penalties on its economy and elites.
While the war is taking place thousands of miles away, the ripple effects of economic sanctions and Russia’s isolation from the global market will be felt in the United States. That includes the real estate market.
How does a war in Eastern Europe affect the U.S. housing market?
So, how does a war in eastern Europe affect the U.S. housing market? Well, the first problem is oil. Russia is a huge exporter of oil and fuels for many European countries, with Germany being the largest importer of oil and fuels from Russia.
When the invasion began last week, the price of Brent crude, the international oil benchmark, rose sharply to $105 per barrel. That price increase was alleviated temporarily after the U.S. and other European nations announced they would release some of their own strategic reserves to dampen the impact of price gains at the pumps back home.
But that changed again when Germany announced that they would cancel Nord Stream 2’s construction, sending the markets back up. Some reports suggest that barrel prices could climb as high as $115 per barrel before we start to see improvements in the price.
As we know, high oil prices lead to higher gas prices at home. The Biden administration has already faced criticism for the current gas prices, which are higher than they were this time last year. As of February 28, the national average gas price was $3.61. The week prior, it was $3.53. In January 2022, the price was $3.35 and last February it was $2.71. That’s a steady upward trend for gas prices, and with this new issue, they could get much higher in the near future.
“Russia’s invasion and the responding escalating series of financial sanctions by the U.S. and its allies have given the global oil market the jitters,” said Andrew Gross, a spokesperson from AAA. “Like the U.S. stock market, the oil market responds poorly to volatility. It’s an explosive situation, and a grim reminder that events on the far side of the globe can have a ripple effect for American consumers.”
This matters to the housing market because expensive gas hurts consumer spending and raises the input costs of industries. In turn, construction costs will rise, leading to longer lead times for housing development and extending the painful supply shortage the housing market is already experiencing.
The travel industry also tends to take a hit when gas prices climb, as consumers are much less willing to spend money on gas prices—and, in turn, tend to cut down their travel plans. This inevitably affects Airbnb properties and other short-term rentals.
And even if the effects of higher gas prices don’t last long and just make a minor impact in the grand scheme of things, it does increase inflation, a longer-term dilemma.
Concerns over inflation and the supply chain
Goldman Sachs released a report in February warning that inflation will be worse than we feared this year. Add in the ongoing issues stemming from the Russia conflict and we can only assume that our concerns will continue to compound.
Inflation recently reached its highest point in decades and federal targets have been anything but accurate. Economists are worried about energy prices sustaining their spike and an amplified supply chain crisis due to the war in Ukraine.
And, the reality is that the odds of the supply chain being devasted are a lot lower than energy prices remaining high. For example, Russia was 20th on the list of imports to the U.S. as of 2019, totaling about $22.3 billion. Compared to the imports higher on the United States’ list like China’s near half-trillion-dollar trading package and $22.3 billion doesn’t seem so big.
Plus, the conflict is situated in a region where naval exports aren’t exactly a major factor. Crimea used to be the main trading port of Ukraine, but it’s been occupied by Russia since 2014. Russia’s use of the port has also been cut off from the rest of the world now that Turkey closed the Bosporus Strait to them. This move prevents Russian ships from accessing the Mediterranean Sea and keeps them tied to the Black Sea.
However, supply chain issues will likely affect European nations more, especially Germany and Italy who have grown closer to Russia via trade. This could potentially harm inflation abroad, which could find its way back to the U.S. That, of course, will make housing, construction, and consumer goods more expensive.
Will mortgage rates decline?
If anything, the war might keep mortgage rates lower for just a bit longer. Conflicts and market volatility tend to push investors towards safer asset classes like treasury bonds and mortgage-backed securities.
These things could dampen the rise we’ve been experiencing in mortgage rates and even go as far as putting downward pressure on them.
“While mortgage rates trended upward in 2022, one unintended side effect of global uncertainty is that it often results in downward pressure on mortgage rates,” said Odeta Kushi last week, the deputy chief economist of First American. “The 10-year Treasury yield is down today, likely in response to the worsening Russia-Ukraine conflict, and mortgage rates may follow suit.”
So far, the average 30-year fixed rate hasn’t moved much. The current rate is pegged at 4.25%. It seems the war is keeping the numbers from climbing, but how long that holds remains unknown.
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Final thoughts on the Ukraine war and housing
The Russian invasion is inhumane and unlawful. Regardless of what happens to the U.S. economy and the housing market, Ukrainians are fighting and dying for their independence and that weighs more than a slight uptick in inflation.
Hopefully, peace is around the corner in Eastern Europe.