How the balance between rising interest rates, international unrest, and supply/demand imbalance … [+]
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Which of the forces pushing and pulling at the US economy will most impact real estate in the coming months? We have inflation, the invasion of Ukraine, and the prospect of increasing interest rates all bouncing off each other and creating chaos in the financial markets. These issues in turn generate fear and loathing both at the gas pump and at the international game of chicken with no possible winner. Real estate professionals nationwide try to distill these current crises into a mix with low inventory and continuing high demand to determine how to price and negotiate for property as the country moves into March and the spring. Here are a few questions:
- How will the Fed react? The Federal Reserve Board finds itself in a tough position. On the one hand, inflation is reaching heights not seen in decades. And prices at the gas pump, already high, now seem to be reacting to the threat of embargoes against Russian oil and gas by climbing even further. In addition to having a big political impact, as these prices, and consumer prices in general, spiral up, households may become less likely to invest in non-essential items. So surely the Fed must raise rates to tame inflation! On the other hand, the instability created by the invasion of Ukraine, and the reaction of the NATO allies, has completely unsettled the stock market, which has fallen deeply last week (although the markets began to recover last Friday, apparently reacting to news of the Russian sanctions). In light of this, should the Fed ease its planned rate increases to stabilize the panicky economy? It’s a dilemma without a clear answer. But whatever the Fed governors decide, it will be impactful.
- What will Putin and the NATO allies do? As Russian tanks continue to roll towards Kyiv, it seems increasingly clear that Putin plans to topple the elected government of Ukraine and reconnect it to Russia as a vassal state. He believes this action fulfills a bargain Russian made with its Western allies at the end of World War II. And some Russian nationals living in those areas near the border between the two countries also seem enthusiastic about rejoining the Russian Federation. The NATO countries, on the other hand, view Russia’s behavior as blatant aggression towards a neighboring sovereign state. Many of the NATO countries, as Dmitri Medvedev pointed out in a tweet, depend highly on Russian oil and/or natural gas; 40% of Italy’s natural gas supply for example, comes from Russian fields. So only time will tell how the fight between practical and tactical considerations plays out.
- What do the next weeks hold for the financial markets? Predicting the future behavior of the stock market tends to be a zero-sum game. That said, many financial professionals see the current plunge in the stock market as unsurprising, given both its recent exuberance and the intense nature of the challenges facing the country. The S&P 500 lost over 5% of its value last week and many experts say they expect the volatility to continue. Will these lead to a downturn rather than a correction? In general, experts believe it will not. Employment numbers remain strong. While consumer spending will be impacted by inflationary pressures, especially for food and gas, demand for consumer tangibles continues to drive GDP numbers. Two avatars of market confidence, car sales and home sales, are through the roof, with the only inhibitor being a lack of supply, not an absence of demand.
The New York City real estate market responds to a unique set of factors. Gas prices impact New Yorkers less acutely than elsewhere because the majority of people don’t depend on cars as their primary mode of transportation. The wages of homebuyers in Manhattan, Brooklyn, and the more proximate areas of Queens tend to be great enough so that interest rate increases of 50 or 75 basis points are unlikely to quash home purchasing decisions. And for many, both here and across the country, real estate remains an appealing hard asset at a time when the stock market seems less reliable.
That said, anxiety and uncertainty both gnaw at consumer confidence. For now, an inadequate supply of homes, combined with buyers’ eagerness to lock in the lowest possible mortgage rates, drive extremely busy New York sales and rental marketplaces. How the balance between rising interest rates, international unrest, and supply/demand imbalance will affect real estate prices and market stability over the next four to six months remains oblique. Crystal ball, anyone?