As Russia continues to invade Ukraine and geopolitical issues rise, many are wondering what this means for the financial markets (specifically real estate). What is the outlook, should I buy a home, do I need to sell my house now, will the war make my home more valuable? These are all questions we may be having about the conflict in Eastern Europe.
To determine the outlook let’s go back in time to early 2003 when tensions in the middle east between the US and Iraq were in high gear. Investors were not concerned with interest rates going up dramatically and they anticipated that current homeowners who had locked in low mortgage rates were in a good spot.
This turned out to hold true even after the US declared war with Iraq in March of 2003. The second quarter of 2003 showed incredible performance as the median price of existing real estate rose 6% from the first quarter and was up 7% from the second quarter in 2002. By the end of the 2nd quarter there were 345,000 new houses available for purchase, up 1% from the 1st quarter of 2003.
Although 2022 faces many unique challenges and the war in Eastern Europe is different than in 2003, investors remain optimistic much of the same may hold true.
Investor Reactions to Russian’s Recent Actions
With the news of Russia invading Ukraine the stock market saw a steep downswing. However, as soon as the U.S. announced that it would be increasing sanctions against Moscow the DOW snapped back, closing down a mere 165 points.
With the concerns of rising inflation rates many people are looking towards property to hedge their portfolios against inflation. Combine this with the fact that many people have put more emphasis because of the Covid-19 pandemic. Today, people tend to view their home as their office, the gym, school, and recreation center. We have no reason to believe this new mindset is going away anytime soon. People are beginning to place more equity on the amount of space they need in their home and are seeing homes as a more valuable asset because of this.
History has taught us affluent investors seek safer investments as uncertainty rises. According to Marci Rossell, chief economist of Luxury Portfolio International, when the world is perceived to be riskier, investors begin to save more and spend less. Some investors have also seen sudden increases in their stock holdings. This could lead to them seeking real estate as a means of rebalancing their portfolio. However, this is the kind of behavior observed by high-net-worth individuals. Which is all fine and well, although for most of us, we can’t just start buying property whenever we want to protect our investments.
The Average Home Buyer/Seller
We can expect aspiring home buyers to become less interested in buying big ticket items as worries of all-out war in Europe may impact the already high inflation rate in the United States. The already rising inflation rates are already hurting buyers, renters, and homebuilders because of the rising prices associated with construction (such as lumber).
The conflict in Eastern Europe is already straining the oil prices across the globe and the price of food is soon to follow. These increases can impact the budgets of renters and buyers as they are forced to save more to afford these types of items. These kinds of price fluctuations impact the entire state of the economy. With overall higher costs of construction and the likelihood of higher mortgage rates, we can expect to see a decrease in homebuying demand in the following weeks and months of the conflict between Ukraine and Russia.
The overall real estate market is going to be impacted in different ways from the conflict in Ukraine. Looking back to 2003 when tensions between the U.S. and Iraq were at their peak, we can better predict what may happen today.
We should expect to see investors scrambling to get their hands on real estate property to hedge their portfolios against inflation and continue to acquire appreciation. Current home owners shouldn’t worry too much if they have low mortgage rates locked in. Conversely, it is likely that we will see demand drop amongst your typical home buyer or builder as inflation and mortgage rates increase.
If you are looking to buy or sell a home in Missouri, reach out to Dennis by calling 573-881-9585.