Since Russia invaded Ukraine, I’ve been asked how this might affect the housing market. First, let me say that the housing market is not the most important thing about this war. I dearly hope the people of Ukraine are able to defend their country’s sovereignty and that this war ends soon.
Back at home, it is hard to know how this war will affect economic markets—and the effects may be both positive and negative. The fighting could drive up interest rates because of inflation, or it could slow the economy, which would maintain or reduce interest rates. Depending on the sector you look at, both things are happening. Since the invasion, members of the U.S. Federal Reserve have been closely monitoring the economic impact and perhaps holding rates a little steadier than they had planned.
If you’ve driven by a gas station in the last week, you know inflation has already arrived—and military action may make things worse. In the last year, we experienced 7.5 percent inflation and even though we are not currently sending troops to Ukraine, we are sending material support. In case you haven’t heard, President Biden just asked Congress for additional $36 billion to support Ukrainian military efforts. In my estimation, the 7.5 percent inflation rate was not just a blip from the pandemic. I expect this inflation rate to continue for a while. With the situation in Ukraine, in all likelihood, inflation will go up.
Keep in mind that my projection on inflation and $5 will get you a cup of coffee at Starbucks. When it comes to real estate, inflation is a double-edged sword with both sides going the wrong direction.
First, inflation typically drives up prices because the cost of labor and materials increases. Also, one of the primary expenses in housing is energy and given the situation in Ukraine, energy costs likely to go up dramatically. If building costs go up, one of two things happens: either those costs are passed on to buyers in form of higher purchase prices, or builders opt not to build, restricting supply and forcing up the prices of existing homes.
Second, inflation impacts interest rates. For the most part, conventional lenders sell their loans to the government-sponsored loan aggregators Fannie Mae and Freddie Mac. Most of those loans go into mortgage-backed securities for investors who want a return on their investment. Investors consider two factors when deciding where to put their money: 1. Tax rates (if a mortgage-backed security pays 6 percent, they net 4 percent), and 2. Inflation (if they get a 4 percent return but inflation is 7 percent, they lose money). Investors’ need for a positive return puts upward pressure on interest rates. When that happens, Fannie Mae and Freddie Mac require higher rates on the loans they acquire from retail lenders. The good news? If inflation drives up home prices, your house will be worth more.
Remember, my projections regarding inflation and interest rates are strictly my opinion. If you plan to make any financial moves, I highly recommend talking to a financial advisor and/or a tax professional, and then doing some soul searching to come to your own conclusions about any home buying or selling decisions.
If you have questions about property management or real estate, please contact me at firstname.lastname@example.org or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery.
Dick Selzer is a real estate broker who has been in the business for more than 45 years.