Update: Russian Invasion of Ukraine
What it Might Mean for Real Estate in 2022
By Carole Vansickle Ellis
This content contains updated information about the Russian invasion of Ukraine that began on February 24, 2022. Since the beginning of the invasion, both sides have sustained thousands of casualties and the United States and its allies have imposed a vast array of political and financial sanctions on Russia while delivering arms and information to Ukraine. This update discusses the possible economic impacts on the United States and specifically the real estate industry.
For more background and historical context for the conflict, visit www.REI-INK.com.
What Does It All Mean for Real Estate?
The United States and its allies continue to impose sanctions on Russia and Russian oligarchs, with the U.S. Treasury Department playing a key role in the design and implementation of what New York Times economic policy reporter Alan Rappeport described in April as “the most expansive financial restrictions that the United States has ever imposed on a major economic power.”
Janet Yellen, Treasury secretary, expressed ongoing concern that sanctions will “amplify inflation” in the United States and noted that sanctions on Russia have already led to higher prices for gasoline and could “bring spikes in food and car prices” globally due to the disruption of Russian and Ukrainian wheat and mineral exports. Last month, we took particular note of inflation, supply chain issues, stock market volatility, and renewable energy. Since then, inflation, oil prices, and supply chain issues have moved to the forefront as primary factors affecting the U.S. housing market and national economy.
In the United States, oil prices seem to be leveling off at about 22% higher than they were days before the Russian invasion of Ukraine. Starting in April, the Biden administration announced it would release 1 million barrels of oil each day from the U.S. Strategic Petroleum Reserve (SPR) in hopes of keeping prices down over the summer. At the time of writing, the European Union had banned Russian coal (with a four-month lead time) and was drafting plans for a similar embargo on Russian oil. However, the E.U. said it would not enact an embargo until after the final round of elections in France on April 24, 2022, since rising prices at the pump could directly affect the outcome.
Rising oil prices traditionally have affected real estate in areas where people are reliant on personal transportation in order to make work-related commutes, but, as Motley Fool contributor and real estate investor Liz Brumer-Smith noted in her observations, remote work could mean that “long commutes are not as big of an issue in the recent past.” She predicted, “It is more likely that we will see a direct correlation between high gas prices and lower demand for housing” as would-be homebuyers use savings set aside for a future home purchase to “float temporarily until inflation and…fuel costs come down.” Brumer-Smith warned this decreased spending could also “negatively impact hotels, short-term vacation rentals, and entertainment venues.”
So far, however, the “belt-tightening” measures typically associated with rising gas prices and inflation have not been in evidence when it comes to consumer behaviors. This could ultimately mean that rising inflation and oil prices have an outsized effect on housing and a smaller impact on assets delivering returns based on short-term spending.
According to first-quarter reports from big banks like JPMorgan Chase & Co., Wells Fargo, Citigroup, and Bank of America, Americans are pessimistic about the economy but are still spending on credit. In fact, this activity was up more than 30% year-over-year during Q1 2022. Much of this spending appears to be “revenge” spending associated with wanting to “get dressed up to go out to dinner again in a restaurant,” as Citigroup CEO Jane Fraser put it.
Consumer determination to spend on travel paired with supply-chain issues has led to a jump in food prices and airplane fares, but, so far, American consumers are using their credit cards to make up the difference and continue to spend. Americans are not paying down their balances as quickly as they had been; according to the banks, running balances have risen as much as 15% since this time last year. This could indicate people are exhausting the savings they built up during the pandemic.
JPMorgan Chase CEO Jamie Dimon said his bank is not yet worried, however. “Charge-offs are…way better than they should be,” he said.
This short-term spending behavior means the housing market is likely one of the first places investors will see evidence of economic cooling or leveling off, and many analysts say this is already happening in the hottest U.S. markets.
Boise, Idaho, is the first of the country’s top 100 housing markets to post “falling” prices, which essentially means in post-COVID lingo that home values in Boise rose only about 0.4% in March rather than more than 4%, as the market posted in June 2021. Nevertheless, Boise prices remain about 70% higher than what median households in the city can afford, which continues to contribute to the slow leveling-off of sales prices in the middle and lower tiers of the housing market in that city.
Even with supply chain stress increasing and affecting the rate of new construction while financial stress and rising interest rates diminish the buying power of would-be homeowners in 2022, it appears unlikely that prices will actually cool in the near term simply because there is such a dearth of supply. Today’s housing market has only 1.7 months of supply (6 months is considered “healthy” and “balanced”), so investors should continue to expect high home prices, although perhaps a slight cooling in terms of competition for properties, in the near future.
What We Hear From the Experts
“We have never seen a time where mortgage rates have risen as quickly as they have and the market has not cooled off. I do not expect the [housing] market to collapse by any means, but certainly it is going to go from a gangbuster market to one that hopefully looks more normal.”
Ralph McLaughlin, chief economist, Kukun (AI-powered property technology data platform)
“We won’t see a downturn because the housing market saw little increase in inventory for the past 10 years. In a few years, Gen Z will be turning 30 and more financially ready to become homeowners than Millennials were at their age. This means that the demand for homes will be as high, if not higher, while inventory will still be behind in the demand.”
Polina Ryshakov, senior director of research and lead economist, Sundae (real estate marketplace for distressed properties)
“The supply-demand imbalance is the primary reason home prices have escalated so rapidly. After not building nearly enough houses for the last decade, homebuilders will take several years, at least, to add enough new supply to balance the market.”
Rick Sharga, executive vice president, RealtyTrac
“Geopolitical conflicts seem to be the wild card and the one that could have further impacts on inflation, which is likely to persist longer than initially expected…. An aggressive increase in [interest] rates could bring about more softening, particularly in the housing markets if mortgage rates spike.”
Selma Hepp, deputy chief economist, CoreLogic
“The ripple effect of the U.S. oil embargo on Russia can lead to even more problems with supply-chain issues, which will contribute to already heightened inflation. As the cost of goods increases, consumers tend to be less comfortable making big purchases like buying a home.”
Natalie Campisi & Rachel Witowski, Forbes advisor staff editor
