War causes inflation to rise faster than the rate of economic expansion, which undermines consumer confidence and restrains the real estate market‘s expansion. The effects of war are likely to be felt by financial markets all across the world.
The current war between Russia and Ukraine is expected to have an influence on financial markets all across the world. Given the volatility of the financial instruments used by homebuyers to finance their purchases, such as equities and cryptocurrencies, the luxury housing market could be the most affected.
According to economists, the housing market in the United States has to be prepared for potential shifts in customer behavior. So, how does war affect home prices? Let’s find out more.
How does war affect home prices in the US?
So, how does the war affect the US housing market? The primary issue with the ongoing conflict between Russia and Ukraine is the low oil supplies. Germany is one of its biggest customers of Russia for exporting oil and gasoline, which are shipped to numerous European nations.
A few months earlier, Russian airstrikes on Ukraine left a trail of devastation. However, the whole world felt the impact of this conflict. International benchmark Brent crude jumped dramatically to $105 per barrel following the incident.
After the United States and several European nations declared they would release part of their own supplies strategically to lessen the excessive increase of oil. However, they were able to temporarily lower it. According to the New York Times,
- “The instability throughout the world can make American customers uneasy and lead them to limit their purchasing and economic activity.”
We all know that expensive oil makes domestic gas more expensive. The Biden administration has already come under fire for the reason that petrol prices are now higher than they were at the same time last year.
Gas costs are now on an increasing trend, and given this additional problem, they may soon rise significantly.
- The median nationwide gas price was $3.61 as of February 28, which was only $3.53 prior to a week.
- The gas cost was $2.71 in February last year, which rose to $3.35 in January 2022.
Since high gas prices reduce consumer spending and drive up input costs for businesses, this has a significant effect on the housing market. Consequently, housing prices will rise, lengthening the time it takes to produce a new home and worsening the acute supply deficit that already exists in the market.
When gas prices increase, the tourism sector also suffers because fewer people are eager to spend money on petrol. They will reduce their trip plans in retaliation. This inexorably has an impact on short-term rental homes like those listed on Airbnb.
A spokesperson from AAA. Andrew Gross said,
- “The oil market reacts poorly to volatility, much like the American stock market does. It serves as a somber reminder that things happening on the other side of the world may affect people in America.”
The short and long-term impacts of war on the housing market
Additionally, even if the consequences of higher gas prices are narrow and have just a marginal influence overall, they still boost inflation, which seems to be a long-term problem. We have listed down some of the short and long-term problems of war on the real estate market of the United States.
The short-term problems of war on the housing market
- Destroys land and property, increasing the latter’s scarcity.
- Reduces the value of the real estate and lands in the vicinity of the conflict.
- Increases the cost of real estate and lands in locations outside the crisis zone as refugees move out of the area.
The long-term problems of war on the housing market
- During the war, regimes frequently shift. Any agreements struck before a new administration comes into power could not be upheld. Even if speculative banks lose this case, land values will still increase to greater heights.
- Prices of everything will climb significantly owing to increased scarcity since some land will probably become unusable.
- Some banks will be successful in estimating the worth of their jack-up.
Will mortgage interest rates drop?
According to Mark Zandi’s account on a real estate website online,
- “Everything is detrimental to the economy and property. Just how awful is up for debate.”
A war may prolong the period of cheap mortgage rates. Investors are drawn to safer assets like Treasury bonds and mortgage-backed equities as a result of conflicts and economic uncertainty.
These factors may potentially exert downward pressure on mortgage rates to temper the current increase.
The first deputy chief economist of America Odetta Kushi said that
- “Although mortgage rates do increase in 2022, this is often an unintentional consequence of increased global unpredictability.”
The typical 30-year fixed rate for real estate mortgages hasn’t changed much until now. At this time, the rate is set at 4.25%. The numbers appear to be stabilizing due to the war, although it is unclear how long this will last.
Supply-chain issues and inflation worries
The federal objective is far from precise, and inflation has hit its highest point in history. Because of the conflict in Ukraine and a growing supply chain issue, economists are concerned that gasoline prices will continue to rise.
Goldman Sachs released a study in February. According to their research,
- “Inflation would be even worse now than we anticipated.”
We can only expect that as time goes on, our fears will only increase, especially given the continuous issues brought on by the confrontation with Russia.
Actually, supply chain disruptions are significantly less prone to high energy prices to occur. For instance, Russian imports to the United States totaled $22.3 billion in 2019, ranking 20th overall. Chinese imports from the United States amount to over half a trillion dollars in trade, placing them higher on the list.
Additionally, the area where the war is happening is not one where naval exports are very significant. The largest commercial port in Ukraine was once located in Crimea, but Russia has seized it since 2014. Furthermore, Russia is no longer able to utilize the port to access the outside world.
However, European nations, especially Italy and Germany, are expected to be more impacted by supply chain issues since they are closer to Russia in terms of trade. This would impede global inflation, which might then creep back into the US and raise prices for houses and construction.
5 statistics about the local real estate markets in the United States
Compared to the number of active purchasers in the market, there are fewer properties for sale. According to reports, the value of real estate in Boston has increased by 118.10% over the last decade. Its yearly appreciation rate is 8.11% greater than the state median average.
Here are some notable details concerning the American local home market’s price growth
- The property values in Boston have increased by 8.5% in the last year. The most recent prediction indicates that they will rise again in the coming years.
- The value of homes in Cambridge increased by 8.6% in 2017 and will do so again in 2022.
- The living cost in Newton is 84% more than the state median, making it a pricey place to live.
- During the past years, Massachusetts house values increased by 15.9%, and they will do so again in the upcoming year.
- The median home price is $704,343, which is an 8.9% increase in the home values in Suffolk County compared to the previous year.