The crisis that is unfolding between Ukraine and Russia is a humanitarian tragedy in the making. Closer to home, the crisis has the potential to change the demand for housing as consumers weigh the financial volatility and uncertainty. Here are three things to keep an eye on in the coming days and weeks.
Roller Coaster Stocks
Fear of an imminent invasion of Ukraine and continued inflation worries pushed the S&P 500 into correction territory, with the index down more than 10%. Since then, the market has behaved erratically as traders evaluate information such as troop movements, political statements, and Western sanctions.
Goldman Sachs suggested an âoutright conflictâ in Ukraine, paired with tough sanctions, could see the price of oil increase by double-digit percentages while stocks could take another 10% dive. It provided an alternative scenario where de-escalation of the crisis could see stocks and Treasury yields jump.
Just more than half of Americans own stocks, but consumers take cues from the market regardless of their holdings (or lack of). Increased volatility, especially if prolonged, could negatively affect housing demand by reducing consumer confidence and eroding the money available to them for a down payment.
Oil Meets Inflation
According to the U.S. Energy Information Administration (EIA), Russia is the third largest oil producer in the world behind the United States and Saudi Arabia, and energy experts expect supply disruptions related to Russian oil exports.
The EIA estimates oil consumption can be broken into three main categories, where the transportation sector accounts for 66% of consumption, industrial for 28%, and residential, commercial, and electric power for 6%. Put another way, higher oil prices can be felt across the economy via higher prices of consumer goods, as well as impacting gas prices.
A hallmark of the housing market since the start of the pandemic has been locational dispersion. Some people have moved farther from the central business district given their newfound freedom from daily commuting, while others have moved farther out for affordability.
Living far from your office wasnât so bad when oil was $65 a barrel, just one short year ago. It may seem a bit more worrisome lately as the cost of a barrel crested $100 in intraday trading, at the same time as inflation is running at its highest level in 40 years.
Consumers who are spending more on gas arenât spending as much on other items. Sustained higher oil prices could also change the dynamics in the U.S. economy from an inflationary environment to a stagflationary one (a period of slower economic activity with high prices).
A short run-up in oil prices is likely to have little effect on housing demand. Oil prices that are higher for longer, especially in the face of higher costs elsewhere, could change the calculus of commuting.
Safety and Mortgage Rates
In times of instability, investors traditionally shift from higher-risk investments to lower-risk investments. Government bonds often top the list of safe assets. The yield on 10-year Treasury bonds earlier this month topped 2% for the first time since 2019 as investors weighed the inflation backdrop and accompanying Federal Reserve policy changes.
Once it became clear tensions were escalating between Russia and Ukraine, demand for safe investments, such as U.S. government bonds, picked up, and that pushed yields down slightly. We are tracking this because when yields go down, mortgage rates tend to go lower as well. The pullback in the Treasury yield has not been significant enough to meaningfully impact the mortgage rate narrative, but, if yields go lower, buyers may see some reprieve on the mortgage rate front.
