In an increasingly globalized world, major events on one continent will inevitably influence the people living on another. This is especially true when some of the world’s major military powers are involved in these events, including Russia, Ukraine, the United States, and the European Union.
The recent Russian invasion of Ukraine, widely condemned by many global leaders, has currently taken the world by storm. Within 24 hours of the initial attack, there are already, tragically, dozens of known casualties and other terrible consequences.
How—and when—this conflict will resolve remains unforeseen. While many important parties are pushing for an immediate solution, the conflict continues to escalate. Many people living in Ukraine are fearing for their lives. While Russia appears to be the clear agitator and escalator in this particular situation, many Russian people (some of whom have expressed clear disapproval of these escalations) share their own set of worries at home.
And while, so far, the United States has mostly been indirectly involved, Americans have concerns as well. Obviously, the top priority is finding a way to establish peace. But even though they are living thousands of miles away, nearly all Americans will be affected by this conflict in some way.
Naturally, many people have already begun wondering: how will the recent Russia-Ukraine conflict affect American markets, particularly the housing market?
The Russia-Ukraine Conflict, Briefly Explained
Following the fall of the Soviet Union in 1991, Russia and Ukraine—who had been united since 1922—became recognized as independent countries. Since then, Russia, by far the largest and most populated former member of the Union, has consistently expressed interest in “recreating” this union with the former member states, though their efforts have generally been contained, primarily due to pressures from NATO and other organizations.
In 2014, tensions between Russia and Ukraine escalated when Russia invaded Crimea, a part of Southern Ukraine with a relatively large Russian population. This conflict was never fully resolved, and the area has since remained in dispute, despite violence generally subsiding. But beginning in 2022, Russia escalated tensions again by recognizing—and eventually invading—two portions of Ukraine, known as Donetsk and Luhansk.
This week, Russia sent various active troops into these areas, among others. Thus far, the campaign has resulted in the shelling of several cities (including the capital and largest city, Kyiv) and numerous known casualties. The invasion has been widely condemned by the Western World, which has imposed intense economic sanctions on Russia with the hope of bringing the conflict to a halt.
Increased Unpredictability
Perhaps the only predictable component of war, in general, is unpredictability. Globally, the most notable economic fallout of this conflict has been increased volatility across nearly every asset class. Even asset classes that seem only indirectly related to the conflict, including the U.S. housing market, have already experienced a spike in volatility by most measures (such as the volatility index).
Many investors will become more conservative about allocating their money when global markets become more unpredictable, whether due to war, pandemic, housing crash, or anything else. This level of unpredictability has been witnessed in previous conflicts, such as the very beginning of the Iraq War (2003) or the Gulf War in the 1990s. Usually, volatility will subside before the conflict is fully resolved, but the rate at which these markets will return to normal will depend on the conflict itself.
Energy, Financial, and Supply Chain Challenges
The fact that Russia—a perpetual rival of the United States—remains at the center of this conflict means that all global markets will be especially likely to be affected. Russia, which is overwhelmingly the largest country in the world by area, is a key producer of oil, natural gas, minerals, and financial services. This means that energy prices are likely to increase and that the global flow of capital will almost certainly be stifled.
Other market events related to the war, such as a decision by Germany to end the Nord Stream 2, will exacerbate these effects even further. Decisions from the U.S., among other countries, to freeze billions of dollars of Russian assets will mean that global capital will be even harder to come by.
What does that mean for the American housing market?
With capital, of any kind, becoming rarer and with economic volatility on the rise, interest rates will almost certainly increase. While interest rates were already slowly increasing after coming off of an all-time low last year, this recent upward swing has undoubtedly intensified the volatility. According to Freddie Mac, interest rates for mortgages increased by about 0.3 percent in the two weeks leading up to the invasion. Though the interest rates has slightly dipped since the invasion, inflation and rising oil prices will likely push the Federal Reserve to raise rates.
The Federal Reserve has signaled that it will continue the current course of rate hikes. However, given the unpredictability, the implications in Ukraine could “be a consideration in determining the appropriate pace at which to remove accommodation,” Loretta Mester, president of the Federal Reserve Bank of Cleveland, told the New York Times.
When interest rates rise, the demand for housing (particularly expensive or high-risk housing) will decrease. Though this conflict is not yet enough to stop American housing from increasing in value, gains within the housing market will likely be a bit slower.
Furthermore, the rate at which new homes are being built—near an all-time high—will likely slow down due to the fact that energy and building materials will be harder to come by. This means that building a new home will likely become a bit more expensive and that, from start to finish, the entire process will take a bit longer.
Market Sentiment Affecting Investors
When analyzing the American housing market, it is essential to look at what is actually happening and consider what investors (and prospective homebuyers) think might happen in the future. If the conflict continues to escalate, investor sentiment will probably turn bearish, further intensifying the previously mentioned problems within the housing market. If the effects—both real and perceived—of the current conflict in Eastern Europe can be limited, then the market will be much more likely to return to its previous state.
If the events in Ukraine have revealed anything, it’s that nothing in our current world ever exists in a vacuum. While you should not let this conflict deter you from buying a home, it will still be important to watch how things play out. We are all hoping for a peaceful resolution.
