by Danny Varona & Kyle Bergquist
Just a few weeks ago, interest rates for a 30-year mortgage were breaking below 6%, oil was only $70/barrel, and Super Bowl MVP Kenneth Walker was still a Seahawk.
Those were the good ‘ole days!
Some warships were in the water, but no planes, missiles, or drones in the air.
Fast forward to today, and a lot has changed.
Rates have jumped about half a percent, oil is over $100/barrel, and the Seahawks no longer have a healthy running back.
There are minelaying boats in the water, and planes, missiles, and drones flying throughout the Middle East as the US and Israel bomb Iran, and Iran retaliates by targeting Middle Eastern neighbors and their energy infrastructure.
Unfortunately, Russia’s invasion of Ukraine has given us a bit of a playbook for how events like this can affect the real estate market.
Rates had started trending higher in late 2021/early 2022, but things kicked into high gear when Russia invaded Ukraine in February 2022. Rates shot up another 3% points in the months that followed, from 4% to 7% within that Spring and Summer.
Rates were always going to rise coming out of the Pandemic, but when Russia invaded Ukraine and oil shot up from $75 to $120/barrel, that just added fuel to the fire.
But it wasn’t just oil prices that the war in Ukraine affected. Those two countries also had an outsized impact on natural gas, wheat, fertilizer, nickel (used in batteries), and neon gas (used to manufacture microchips).
Wars don’t directly drive mortgage rates, but they can create inflationary pressure through higher energy and commodity prices. That, in turn, can push interest rates higher, particularly if markets expect inflation to persist.
In short, the sanctions on Russia, and Ukraine’s inability to export caused prices across the board to shoot higher. The war in Ukraine helped propel worldwide inflation higher, which propelled mortgage interest rates into the 7s (and low 8s for a while there).
Unfortunately, just like in 2022, we’re seeing prices shoot higher once again, which is why mortgage interest rates have gone from slightly below 6% to the mid 6s in a matter of days.
Everyone’s heard by now that oil prices have sharply increased; but aluminum prices are at their highest in 4 years (producers in the Persian Gulf account for about 8% of the world’s aluminum); 50% of the worlds sulfur (used to make fertilizer) is trapped on the wrong side of the Straight of Hormuz, and Qatar produces nearly one third of the worlds helium (helium isn’t just for balloon, its widely used for manufacturing computer chips and electronics, and for welding). But notably, higher oil prices affect almost everything in today’s world.
The good news is that we (the US) have more control over the outcome than we did in 2022. And economically-speaking, the fundamentals haven’t changed for why mortgage interest rates were breaking beneath 6% in the first place.
With that said, it’s anyone’s guess for what happens from here, as the ending to this story will be determined by how long this continues.
Take It Home
The housing market started the year on a tear. The Mortgage Bankers Association reported the most mortgage applications to purchase a home in January in three years!
There was local housing inventory to look at, and buyers were starting to get going (with pending transactions to purchase a home up 73.5% from January 1 to March 1 in Seattle).
But then we went to war with Iran, and now rates are higher.
In the near term, this introduces upward pressure on mortgage rates, though how long that lasts will depend on how markets interpret inflation risk from here.
Are we worried about the Puget Sound Housing Market? No. We just had 3 years of mortgage rates above 7%.
Moreover, our local economy continues to thrive with major engineering outposts being established for xAI and OpenAI, which solidifies Puget Sound’s foundation as the AI revolution takes hold.
We are still expecting a strong spring housing market, though its trajectory may hinge on the duration of the conflict in Iran, as war can be a headwind for housing.
Peace.
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