Mortgage Rates Spike As Markets React to the Russia-Ukraine War and Rising Inflation

The Russia-Ukraine War and The American Economy

Since Russia’s first attack on Ukraine on February 24, the world at large has been gripped by the tales of tragedy and loss, as well as the strength and resilience of the Ukrainian people. And while the majority of Americans support U.S. efforts to aid Ukraine and disincentivize Russia’s invasion, many still express concerns over the economic impact the foreign war is already having on the American economy.

The most obvious of these impacts, of course, is the sudden increase in gas prices across the nation. Average gas prices are now upwards of $4.20/gallon, compared to $3.54/gallon a month ago, and just $2.87/gallon at this time last year, according to AAA.

As the conflict between Russia and Ukraine became eminent, oil prices soared to an eight-year high in late February and continued to climb through early March. With Russia as one of the largest global exporters of crude oil, traders reacted to the Russian-Ukraine conflict by predicting oil supply disruptions which are now playing out in real time. As the conflict has escalated to war, both the United States and the European Union have placed strict sanctions on Russia’s exports, driving oil and gas prices higher in turn. After a 20% drop in mid-March, oil prices rose back up to previous highs when peace talks between the two warring nations deteriorated.

Perhaps less immediately felt, but equally concerning, are the potential and likely supply chain disruptions in other economic sectors. With both Russia and Ukraine serving as key agricultural suppliers, food prices worldwide will be pushed higher. Likewise, both countries are also exporters of rare earth metals. Most notably, Russia has historically supplied nearly half of the world’s palladium, as well as a smaller percentage of platinum and nickel. Shortages in these metals will impede microchip production schedules, which could create shortages in an array of electronics, including cars, that rely on this technology. Perhaps our stateside economy may have been able to absorb this supply shock caused by the war overseas if it were not coming on the heels of the existing shortages caused by the coronavirus pandemic.

In summary, international affairs are impacting American wallets in a very real fashion. Inflation, which was already on the rise post-pandemic, is being forced higher by trade tensions. Measures that were previously taken to ease the financial burden on consumers—such as stimulus payments and tax credits—are no longer a part of the picture. For the immediate future, at least, Americans should be preparing to acclimate their budgets to the elevated costs of gas and other goods.

Inflation and the Homebuying Industry

Inflation is defined by Oxford Dictionaries as “a general increase in prices and fall in the purchasing value of money.” Essentially, as the cost of goods—like gas or bread—goes up, the amount of those goods you can purchase per dollar goes down. The purchasing power of your money has decreased because you are only able to buy a fraction of the goods for the same amount of money. Whereas you could fill up your gas tank for $45 a few months ago, you are now buying half of a tank for the same amount of money. That’s inflation in a nutshell.

In the home-buying industry, mortgage rates will be the aspect of the business most directly impacted by recent inflation. That’s because mortgage rates are typically controlled by the bond market.

Treasury bonds, which are backed by the U.S. government, and mortgage-backed securities (MBS), which are bundles of mortgages sold to investors, are some of the safest investments available for trade. This is in large part because they are fixed-yield assets. Unlike stock market shares whose values fluctuate up and down, the return on treasury bonds and MBS are fixed at the time of purchase. In times of stock market volatility, investors will often gravitate to the relative security of bonds. When investor interest in MBS is high, mortgage rates are pushed down.

Inflation, however, complicates the risk-reward analysis of stocks vs. bonds. With bond purchasing, the investor is essentially loaning another party (the government, a bank, or a company) a set amount of money (the principal) in exchange for a fixed annual return (often a percentage of the principal investment). These bond agreements also include a set period of time before the loan will be repaid (maturity term), often anywhere from 5 to 30 years. If rising inflation is a concern, investors now must consider whether the investment will be worth the annual yield. Whereas stock market prices will often keep up with inflation, the fixed-yield nature of the bond market means these investments will not.

So, investors have to consider if the buying power of their annual yields will diminish over the length of the loan. Likewise, investors do not want to lock in a low yield for 30 years, when bonds will likely offer higher yields in just a few years, in order to keep up with inflation. In other words, an MBS offering 2% yields today, might be offering 3% at this time next year. When inflation becomes a concern for investors, the safety of bonds becomes less desirable because of their inability to keep up with cost increases. And, in order to remain attractive, treasuries and bonds are then forced to offer yields at a higher rate. This is when we see borrower interest rates, like mortgage rates, go up as well—which is exactly the landscape we are faced with today.

According to the U.S. Bureau of Labor Statistics, inflation was at its highest rate since 1982, at 7.9% for the previous 12 months as of February 2022. Following suit, mortgage rates are also on the rise, landing at 4.42% for a 30-year fixed-rate mortgage for the week ending March 24. That is the highest mortgage rate we have seen since November 2018.

How Industry Professionals Can Succeed Amid Rising Mortgage Rates

While the boom of the past two years may be behind us, industry professionals need not fret yet. In the short term, buyers impatient to make a move will be eager to lock in current rates before they climb any higher. Now is the time to reach out to current clients and present them with their best options for buying a home now.

After this initial surge, we can anticipate a lull in buyer interest. While this may mean fewer clients rushing through the door, it should also give industry professionals the breathing room to get back to the basics of business. Namely, this is a time to focus on building and strengthening relationships—both with clients and other industry professionals.

Without low-interest rates ushering clients through the door in droves, relationships are once again going to be the cornerstone of this business. Keeping in touch with your professional network and referral partners will help you stay apprised of their concerns and needs so you can adapt your services accordingly. Additionally, frequent contact will keep you top of mind for new business referrals, especially if you are regularly adding value to members of your network. Providing updates on your areas of expertise via email or newsletter, or simply being available to answer a quick question are both excellent ways to help fellow professionals while also demonstrating the value you add to their network.

Likewise, regular contact with past and current clients is key during a market downshift. Stay informed of market fluctuations like mortgage rates, home prices, and housing available so you can reach out to your clients when any of those factors shift in their favor. As inflation shifts the landscape, it’s also wise to be aware of how increased mortgage rates and/or home prices will impact buyer loan eligibility, which can be based on variables such as debt-to-income ratio. Likewise, keeping your loan products diverse will help ensure you can customize a loan solution for each client’s individual financial situation.

Now is the ideal time to sit back and reassess your approach to attracting new clients and reconsider your strategies for keeping up with your industry network. In an industry that ebbs and flows with the economic tide, grit and creativity will serve you well in generating success in spite of the challenges.