Should You Fear the Russian War’s Stress on Housing?

It’s natural to have some fear as war breaks out. Let’s take a step back and be thankful for those of us not in the middle of the war. They are the people who have it truly bad. My children asked me why gas prices are going up and I said it was us doing our part to help the people of Ukraine. I’ll leave it to the comments on whether we should do more. I hope you’ll permit me to confine my remarks to real estate even in the midst of tragedy going on in Europe.

For the past few weeks, mortgage interest rates had been creeping up. On Thursday, according to Barron’s, the average 30-year fixed mortgage dropped for a second consecutive week. Investors are buying up ‘safe’ assets like bonds right now out of fear that the stock market will fall.

The Dow Jones Industrial Average on 2/24/22 was 33,223 and closed on Friday, March 4 at 33,614. The 24th was when the hostilities became hot but Russian troops began amassing near the border for a couple of months. The DJIA high was on January 4, 2022 at 36,799. I think the only thing we can read into this is that the market is volatile.

It Comes Down to Gas

The decrease in mortgage rates will have a small effect on home purchases. Many would-be buyers have been looking for a home for so long that a change in the rate won’t cause them to bat an eye. They will see the war as far away as long as US troops are not directly involved.

Yet, the increase in fuel prices are the marquee headline that is in everyone’s face as we drive past gas stations on the way to work. The US and partners are opening up strategic oil reserves to blunt price increases, but the war’s effect will still be felt. Congress seems to have broad support for boycotting oil imports from Russia. The US imports about 1 – 5% of its oil from Russia; banning oil imports would have a significant impact, but maybe not a severe one, on US fuel prices. Of Russia’s oil exports, the US buys 13%, so this loss of income would sting but probably not be crippling. Should Europe and the US stop importing Russian oil, the effect on Europe would be extreme, as much of this petroleum is used for heating. NATO governments are trying to avoid this scenario.

With the push to ban US import of Russian oil gaining steam, we will be seeing fuel prices increase and this will have a ripple effect into items that need to be transported. New home prices will continue to rise. According to the US Census Bureau, new housing permits continued to increase but completions were stagnant over January, 2022. This could be due to potential home buyers thinking twice before starting or banks getting cold feet on making their loans. We will have to wait a couple weeks to see what the data showed for February.

Fear for the Housing Market

Uncertainty is the enemy and it abounds right now. The limited inventory is going to be the thing that keeps the market going for the next few months. The US still has a housing shortage of 5 million homes and without an increase in new home starts, the market will continue to be red-hot. All that changes if the US enters the war, however. For me, I’m continuing to invest. At least in multifamily and retail. I’m avoiding single family homes.

Dr. Equity