The images spread across social media and broadcast by television networks out of Eastern Europe have shocked and frightened many: columns of tanks stretching dozens of miles, burnt-out cars and craters marring city streets, men and women in civilian clothes crouched behind sandbags. It is not that the last decade has lacked conflict and war—from Syria to Myanmar to Ethiopia, unrest involving regional powers and complex geopolitical issues continue to affect tens of millions of people worldwide.
Russia’s sudden, unprovoked invasion of Ukraine is unique, though, if not in its tragic threat to human life, then in its potential for disrupting the global economy. In his State of the Union address last night, President Joe Biden admitted that sanctions, combined with the destruction of the war itself, will affect people far outside the conflict’s immediate sphere.
“To all Americans, I will be honest with you,” he said. “A Russian dictator, invading a foreign country, has cost around the world.”
This includes the real estate industry, which is tied closely to the global supply chain and financial markets, which are almost certain to react—though to what extent and in what direction is not certain.
“I think everybody is finally breathing a sigh of relief with the relaxation of masking guidelines and starting to open up again, and I think people are just exhausted,” says Greg Reed, associate director of the University of Wisconsin’s Graaskamp Center for Real Estate. “Just as things are starting to open up again, now we have to contend with this level of uncertainty—and the markets never, ever like uncertainty.”
Experts and economists are careful to say that the crisis is evolving rapidly, from the state of sanctions to the situation on the ground in Ukraine to various political machinations and alliances across the globe, and no one truly knows what the possibilities are or how serious the problem could become. At the same time, there are fundamental mechanisms that are already reacting.
Matthew Gardner, chief economist at Windermere, recently upped his forecast for interest rates.
“I think that the average of the first quarter of this year is going to come in at 3.8%,” Gardner predicted. “The average for the second quarter is going to break 3.95%. We’ll break north of four in the third quarter. My forecast is 4.03% and in the fourth quarter—4.15%.”
But this is not necessarily going to have any marked effect on the housing market, he adds, as rates are still at enticingly low levels and demand appears to be holding into 2022.
“Yes, they are rising, but I’m going to want to see a rate that’s going to hold or increase from 4.5% upwards before I believe it will have any palpable change in demand or in price appreciation,” Gardner says.
Mortgage rates have been climbing weekly since the start of 2022. However, a flight to safer investment options—bonds and mortgage-backed securities—amid geopolitical conflict could drive rates down in the near term, according to experts at the National Association of REALTORS® (NAR).
“At least temporarily, which could be one month or two months, the mortgage rate will stop rising and may even decline,” says NAR Chief Economist Lawrence Yun.
Despite the lull in mortgage rates, Yun thinks rates will resume their uptick as the fighting between Ukraine and Russia is mitigated.
NAR has also suggested in recent reports that Russian attacks in Ukraine could contribute to additional economic volatility in the coming months alongside the impending conclusion of the Federal Reserve’s asset purchase program.
In prepared remarks for the House Financial Services Committee, Fed Chair Jerome Powell said he “expect it will be appropriate” to raise rates in March despite the uncertainty around Ukraine. The central bank has long telegraphed an end to the near-zero rate it implemented during the pandemic.
Powell mostly declined to address Ukraine-related issues in his testimony this morning but said that the “effects of sanctions so far appear—for now—to have been significant.” He added that events in Eastern Europe are “highly uncertain” and that the Fed “needs to move carefully.”
“We will use our tools to add to financial stability, not to create uncertainty,” he promised.
Amid the uncertainty, Marty Green, a principal with Texas mortgage law firm, Polunsky Beitel Green, thinks that Russia’s invasion could push the Federal Reserve to adopt a more moderate quarter-point rate increase rather than a previously proposed half-point increase.
“The Federal Reserve may also note that the disruptions caused by the conflict in Ukraine could exacerbate inflation, requiring it to end its bond-buying support more quickly and increase rates at a faster pace and in greater increments than normal,” Green said in an email to RISMedia.
In an already elevated inflationary environment, Yun thinks the Fed could take a more aggressive approach to address the elevated inflation as a result.
“All these factors eventually impact other economic variables like mortgage rates, and this invasion of Russia…is certainly a very big event and it remains to be seen how everything will be resolved; but during this time, I think that uncertainty will lead to people wanting to hold safe assets of U.S. government bonds, and that will bring down mortgage rates,” Yun says.
Experts from the Mortgage Bankers Association (MBA) echoed similar sentiments.
While the MBA hasn’t changed its forecasts for mortgage rates yet, experts from the organization told RISMedia that Russia’s invasion of Ukraine coupled with impacts from the pandemic and expected rate hikes by the Fed could impact their next rate publication this month.
“Even before the Ukraine situation came about, we were already talking about high inflation, and how that combined with expectations that the Fed would start to tighten its policy…those are already putting upward pressure on rates,” says Joel Kan, MBA’s chief economist.
MBA’s most recent expectations claimed that mortgage rates would hit 4.25% by the end of 2022, accounting for a 40-basis point increase between now and then, Kan says.
“Either way, we were looking at a gradual increase in mortgage rates between now and the end of the year,” he continues. “Generally speaking, geopolitical events always move markets, and we also had the lingering concerns about the pandemic. Even though it seems that most of the public health situation and COVID-19 situation has been improving, that still has the potential to push rates one way or the other.”
The jury is out on how the Ukraine crisis will impact the domestic residential real estate market, but experts have opined on the potential implications.
Green thinks would-be sellers could opt out of listing their homes until the situation in Europe becomes clearer, which could strain an already thin supply of homes for sale in the market.
“Perhaps others will decide that now is a great time to sell and monetize the equity that has been created with the substantial price increases of recent years,” Green added. “But in the end, my overall sense is that this decision will be more driven by other considerations than by the events in Europe, absent the conflict widening.”
According to Reed, the potential for prolonged or medium-term disruption to real estate markets is not unlimited.
The primary short-term or immediate effect stems from the extensive sanctions levied against Russian banks and oligarchs. Reed says London and New York City have, for decades, been inundated by Russian buyers at the high-end of real estate. Because of the suddenness and strength with which western countries delivered their financial response, real estate deals in progress could even fall apart.
“I definitely think it’s going to have a huge impact,” he says. “Russians are not able to move their money out of the country because of sanctions; they can’t leave the country because flights are banned from their airspace…if there’s a wealthy Russian that needs to sell right now, what are they going to do with their money? Where are they going to be able to put their money? They’re not going to be able to bring it back, and they probably aren’t going to want to.”
When asked how this will likely impact the housing market ahead of the spring buying season, Yun says that concerns over mortgage rates and job status are always top of mind for domestic buyers, especially first-time buyers who are already struggling with persisting affordability challenges.
“They are barely squeezing in to get the mortgage, but if the mortgage rates are meaningfully higher, they essentially won’t qualify, so it’s bad news for first-time homebuyers,” Yun says.
Beyond impacts to the mortgage rates, Rob Dietz, chief economist for the National Association of Homebuilders (NAHB), says that leaders in the construction sector are also keeping tabs on events in Ukraine as builders continue to deal with persisting supply chain challenges.
“The events in Ukraine add another complicating factor to that set of challenges,” he says, adding that the impacts on builders will likely be more indirect.
For example, the price of oil is going up globally, which Dietz says could impact the sector from deliveries to the production of building materials.
“It’s embedded in the cost of just about every kind of input that businesses are using, including building materials,” he continues. “Some petroleum products are used to make resin, which is used to make products from furniture to or just the actual distribution and transportation of materials and workers.”
Jordan Grice and Jesse Williams are RISMedia’s associate online editors. Email them with your real estate news ideas, jgrice@rismedia.com and jwilliams@rismedia.com.