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The Effects of War ...

The Effects of War on the Housing Market

By Oren Jacobson 5 min read

In my last article, I laid out the case for what would likely be a strong housing market in 2022. However, I also added a caveat — specifically that there were several significant macro variables that could alter the trajectory of the market. At the time I wrote that article, I certainly wasn’t considering the possibility of an unprovoked war in Europe involving a nuclear power with a massive impact on global energy. 

One of the first rules of analyzing the impacts of any war is that once a war begins, there’s simply no way to know what happens next. It seems clear at this point that Putin didn’t expect a massive and effective resistance movement from the Ukrainians. In another twist that is unexpected based on recent history, the European Union, a loose supranational confederation of nearly 30 countries that agree on almost nothing, responded aggressively in collaboration with the United States on the largest and fastest sanctions regime in modern history.

As we sit here today, it remains unclear when and how this war will end. This means predicting its impact on various aspects of our lives is very difficult. However, there are three main areas we should watch relative to housing:

1. Energy Prices
2. Supply Chains and Inflation
3. Consumer Confidence

Let’s start with energy prices, which have risen sharply since the war started. In particular, the cost of gas is at its highest nominal level in decades, even as it remains below inflation-adjusted highs (for now). Even if the United States releases oil reserves, increases the production of oil and natural gas, and gets other producers to do the same, given the role Russia plays in the global energy market combined with the fact that we’re soon entering a period of the year when driving increases dramatically at home, gas prices look likely to remain high. Frankly, it’s probably going to go even higher in the weeks ahead. That’s before you get into the question of whether the EU takes the extraordinary step of moving away from Russian-provided oil and gas. The longer the war goes on, the more likely that becomes. Their energy needs must be satisfied somehow, and we’re already in a tight balance of supply and demand. Every step of the supply chain in housing is tied to energy prices, meaning costs and prices are likely to go up. 

That leads us to the impact on supply chains and inflation more broadly. Given that rising energy prices were already one of the largest contributors to inflation in early 2022, one would expect that trend to continue — and that’s before we factor in the role of Ukrainian wheat in the global food supply. The war itself certainly can’t do much to help supply chains in general, which were already constrained due to COVID. Put all of this together, and there’s likely to be more continued upward pressure on prices in the broader economy and corresponding pressure on the FED to manage that problem. Before the war, the concern may have been that the FED would act aggressively to stop runaway inflation, which could itself cause a recession, by raising rates quickly, which could also cause a recession. The war just adds another layer of massive uncertainty into an entity that’s trying to make monetary policy decisions based on imperfect data. The short story here is that we should expect more supply chain issues, which means upward pressure on housing costs and prices. 

The third factor that matters is consumer confidence. If people think it’s still a good time to buy, they will — however, wars tend to change consumer behavior. In our situation, the questions really fall along two lines. The first is whether Americans fear the war expanding beyond Ukraine in a way that could bring America into direct conflict with Russia. This would be the first time two nuclear powers have been on the opposite side of a “hot” war (compared to a “cold” war). Today, this seems highly unlikely, as President Biden and NATO have been clear they don’t want to escalate this, but wars are unpredictable. What if Putin attacks a NATO country as well? Or invades another neighbor on the border? If that happens, all bets are off, and the discussion will quickly pivot to comparisons of German aggression in the 1930s. 

The second line in question is about the impact of inflation on affordability. Meaning if the war continues to drive energy, consumer goods, and food prices up, to say nothing of the impact on housing costs/prices and mortgage rates, do potential buyers feel less comfortable moving forward? It’s on this front that the war carries the most risk for housing.

In reality, these three main areas of concern (energy prices, supply chains and broader inflation, and consumer confidence) are interconnected. In fact, consumer confidence dropped to an 11-year low in early March, largely on the backs of inflationary concerns. The more the problems build up on the first two, the more likely the third problem is to build up as well. That’s especially true when you factor in the low supply on the market and steadily increasing housing prices. At some point, people can no longer qualify or are no longer willing to buy a home at a given price or payment. 

Given this last piece, the most likely short-term impact on housing is a continued tightening of the affordability puzzle for entry-level buyers. This means that fewer people may be able or willing to move forward, and our pie of potential buyers may shrink. It’s also reasonable to expect more tightening in the first move-up market. However, it seems likely that there is still more demand than supply in the market and, until this changes, prices will remain elevated and builders will continue to see strong results.

Originally published Mar 16, 2022 under Explore the latest topics, updated January 24, 2024

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