The 2022 Russia invasion of Ukraine has caused economic insecurity worldwide. Will it worsen or ease the US housing market’s current problems?
On February 24, 2022, Vladimir Putin ordered a full-scale Russia invasion of Ukraine. The United States and its European allies have placed strict sanctions on Russia’s financial institutions, with four of its largest banks cut off from the US financial system. This sanction is just one of several, all of which intend to throttle Russia’s economy and stop Putin from making further advances in Ukraine. Other sanctions include the export ban on specific oil refining technologies to prevent Russia from modernizing its oil refineries—a sanction that the European Union has also imposed.
As of March 3, 2022, the United States has sanctioned 24 Belarusian individuals and entities. These include two Belarusian state-owned banks, seven officials and elite personalities connected to the Putin regime, and nine defense firms.
Members of the European Union, Canada, Japan, New Zealand, and the United Kingdom have likewise announced stringent sanctions on Russia. Like USA’s sanctions, these countries also aim to push Putin against the wall.
Meanwhile, the entire world watches as the effects of Russia’s invasion of Ukraine unfold. A week after the attack started, the global economy was shaken. Oil prices have gone up, and with Ukraine and Russia producing 14% of the world’s wheat, a domino effect on the prices of the world’s goods is expected.
Effect of the Russia Invasion of Ukraine on the US Housing Market
With that said, how does the Russia invasion of Ukraine affect the US housing market? America’s real estate market went haywire in 2021. The demand for houses skyrocketed, but the supply was too scarce to meet the demand, leading to a steep increase in home prices.
At the onset of 2022, housing experts assured everyone who has a stake in real estate that the 2021 trend will spill over to 2022 but should have some semblance of balance beginning the middle of the year. In short, experts were saying that 2022 will be another bright year for the real estate industry.
However, the Russian invasion of Ukraine was never a part of the equation. So, the question now is: “Will the US housing market remain rosy or end up being bleak?”
What the Experts Say
Although some realtors choose to be optimistic in saying that Russia invasion of Ukraine might be the weight the industry needs to balance supply and demand, economists are advising realtors to brace themselves from the impact of the invasion.
Distressed Luxury Housing Market
Economists believe that the biggest upset will be on the luxury housing market. Typically, buyers and investors of luxury homes rely on their stock and cryptocurrency investment to finance their home purchases. Unfortunately, both markets have become volatile since the conflict erupted.
Worsening Inflation Rate
Even before the Russian invasion of Ukraine, the US has been suffering from a high inflation rate. The ongoing conflict is expected to hurt oil and food prices, worsening the country’s inflation. With the whole world in a wait-and-see situation, consumers are more likely to hold off on spending on large-ticket items such as real estate.
The increase in gas and oil prices will cause more problems in the global supply chain, and the real estate industry will feel the pinch. The construction of houses to meet the rising demand has already suffered a setback because the price of construction materials has risen by 22% and lumber by 40%. And that was even before Russia started attacking Ukraine.
These factors—the rising inflation rate the increasing cost of lumber and other construction materials—are expected to worsen in the days to come unless the conflict ends soon. The worsening scenario will aggravate home affordability and decrease the demand for houses.
Increasing Mortgage Rates
When the conflict erupted, US mortgage rates dropped from an average of 4.19% to 3.90% for the 30-year fixed mortgage. But not for long. With the looming inflation and Federal Reserve policy changes, the average mortgage rate on the 30-year fixed mortgage has reached 4.28%.
Lower Demand for Houses
The increase in mortgage rates is distressing for homebuyers. Property prices continue to increase at a high rate, making home purchases challenging, especially for first-time homebuyers.
Hope for the Housing Industry
As of this writing, real estate insiders reported their observations on what’s been happening to the real estate industry since the invasion. These observations indicate that the effects of the ongoing conflict may not be as bleak as expected.
The number of active listings for sale has improved for the fifth straight week ending March 4.
Escalating Buyer Competition
Mortgage applications increased by 8.5% as of March 4, 2022, with several homes selling above their listing prices. Pessimists may see this increase in applications as an offshoot of the drop in mortgage rates when the invasion began. It remains to be seen if the number of mortgage applications will decrease now that the rates have gone up.
What the Russia Invasion of Ukraine Means to Real Estate Investors
Amidst all the uncertainties, it would be easy to advise investors to wait it out.
However, Tom LaSalvia, senior economist and housing specialist at Moody’s Analytics, notes that global investors look to the US for Treasury and Real Estate investments in times of uncertainty.
Besides, people will need shelter. They will still buy or rent a home regardless of the invasion. Real estate investors need not wait, but they need to be careful with where and how they invest. Think: is it wiser to invest in a traditional rental income or an Airbnb rental at a time when people prefer to spend their hard-earned money on essentials?
Investors who would like to succeed in these uncertain times should look beyond the top housing markets. They need to look for comparable properties and cities that won’t financially drain the renter and still earn a good investor’s profit.
For instance, Zillow predicted Tampa FL real estate market to be this year’s hottest. However, based on Mashvisor data as of March 10, 2022, Tampa’s housing stats were as follows:
- Median Property Price: $866,042
- Monthly Traditional Rental Income: $2,462
- Traditional Cash on Cash Return: 2.52%
- Price-to-Rent ratio: 29 (high)
Compare that with Suwannee FL real estate stats:
- Median Property Price: $350,938
- Monthly Traditional Rental Income: $1,373
- Traditional Cash on Cash Return: 9.32%
- Price-to-Rent Ratio: 21 (high)
It’s not a gloomy outlook for real estate investors after all.
The Russia invasion of Ukraine brings the world into economic turmoil. With oil and gas prices going up, people worldwide are bracing themselves for rising inflation rates.
For the US housing market, most experts believe that their forecast of a bright year ahead for the housing industry has been crushed by the ongoing conflict. But optimists choose to see the silver lining despite the precarious situation.
Real estate investors may choose to wait it out or go for it, depending on their risk tolerance. But we advise those who will brave the storm to decide wisely and perform a thorough investment property analysis.