There were 3 rate hikes identified at the Fed December board meeting.  Then with the release of a 7.5% Consumer Price Index, there was word of increasing the number of hikes to 7. Bullard’s additional comments threw the 10 year into a panic and pushed rates above 4% last week as he noted 100 bps are needed to happen before July 1st.  The market became weary that the Fed knew what it was doing and what their impact on housing would be.

Note: this is atypical. Typically the 10 year treasury will go down as the Fed raises the short term Fed Rate to control inflation as inflation strips away the benefit of long term bond income.  In this case, it wasn’t the raising of the rate but the fear we were already behind the curve in a solution that the bond market didn’t like.  As the fear drove the 10 year above 2%; our 30 year fixed rates moved above 4%.  Watch this.  If the 10 year moves towards 2.5% our 30 year fixed will climb to 4.5% and impact our buyers affordability in a rising home price market.

If I look back 6 months the principle and interest payment on a $600,000 loan was almost $500 less than it is today.  That’s a 19% increase in payment without accounting for the approximate 10% home price increase that happened during that same 6 month period. Needless to say, the FED impact on housing is prevalent.

Back to Russia.  Okay… the Fed is behind the curve and planning on pushing up the Fed Rate as soon as Quantitative Easing is complete… i.e. March.  Without Russia, we might have seen some relief in the mortgage rates as the Fed started raising rates.  They still have Quantitative Tightening (QT) ahead which will push rates up… but for a minute we could see rates go down, then as QT kicks up, rates will rise until the Fed officially pushes the economy into a recession.

Note.. a recession is simply 2 consecutive quarters of GDP decline.  70% of the GDP is consumer spending.  Consumers are insatiable and putting an incredible strain on the lack of supply.  A little drop in consumer confidence and consumer spending WOULD NOT be a bad thing.

In comes a war… unbelievable in fact.  It’s hard to imagine with today’s world economy, instant new cycles and viral videos that we would get here.  But we did.  Now Russia who is the worlds biggest exporter of fertilizer and Europe’s biggest supplier of oil and gas, is under a number of sanctions and possibly more will be applied.  Ukraine is also not exporting as they are fleeing their homes for safety.  They supply the world with manganese for steel, iron ore, barley, corn and are Europe’s biggest supplier of Uranium.  Supply is further constrained.

In addition, China and Russia are very strong allies.  If China supports Russia with this invasion, look to Russia supporting China in it’s invasion of Taiwan.. the world’s biggest supplier of micro chips.

Extreme supply constraints is how Russia will impact the U.S.  And as stated before.. the timing could not be more interesting.  As the Fed was just about to raise the short term Fed Rate to control inflation; now their move will have little to no impact.  As the price of food, gas, rare minerals which are used to manufacture the products we consume, the houses we build, the cars we drive will continue to go up regardless.  The Fed’s action now has less impact.  In fact, if they raise the Fed Rate too much, all they will do is increase the cost to borrow, build and supply here locally.  It’s a hard choice they have to make, as we aren’t just talking about an impact on housing anymore.

Constrained supply with insatiable demand is not a good mix.  Russia could move us from going into a recession to a Stagflation economy.  Stagnating economic growth while pushing up the price of everything.  Look for higher rates short term as we work through this economic dilemma with days of uncertainty giving the 10 year a chance to relax.

When your buyers go under contract, LOCK!.  Don’t waffle on what will happen in March.. as the impact is skewed even more now with Russia.  If the payment matches the budget, lock in the rate.  Buy now not later.  House prices will continue to go up as builders will continue to be strained getting permitted homes started and started homes complete.  Investors will continue to soak up supply of single family homes knowing rents will continue to go up as buyers get frustrated and turn to renting.  Rent for a 1 bedroom in Denver is now up to $2,178.

New construction … I get asked all the time.  Should I lock?  Rates will go down if we get pushed into a recession.  Rates will stay high if Stagflation is where we go.  Again.. if the budget works LOCK IT.  The only hesitation I have on new construction is when will it close?  Get a firm date, as extending rate locks is not cheap.

Worried about rates going down after you’ve locked in?  Refinance.  Done.