Love, Money + Real Estate #013

War, inflation, + mortgage interest rates are all ramping up

Ilyce Glink

Apr 20, 2022

Greetings!

I’ve been watching the war in Ukraine, inflation and mortgage interest rates ramp up over the past two weeks. It all spells trouble for the U.S. economy.

The devastation in Ukraine is brutal. Russia’s attacks on a population that is more fraternal than anything is painful and frightening to watch. Millions of people have already fled. (I met a few of them on my flight back from San Diego last week, where they apparently entered the country via Mexico.) And, the fighting, casualties, and effects on the global economy are only getting worse.

As the war intensifies, inflation and mortgage interest rates have been rising dramatically. We’re almost in uncharted territory, with inflation hitting 9% (heights we haven’t seen since 1980) and mortgage interest rates at an 11-year high. Mortgage demand is half of what it was a year ago.

The war and rising inflation are making it tougher for consumers across the globe to buy food, clothing and energy.

Ukraine has six primary products with over a billion dollars in export sales: corn ($5.8 billion), sunflower seed ($5.7 billion), wheat ($5.1 billion), rapeseed ($1.7 billion), barley ($1.3 billion) and sunflower meal ($1.2 billion)….It represents 77% of Ukraine’s agricultural sales.

The Ukraine crop calendar indicates that by now, all of the barley should be planted. Corn, rice, soybeans and sunflower seed should be well into the planting cycle. But, they’re not. And, if they can’t be planted in the next few weeks, the entire crop will be lost. Ukraine is currently running a deficit of $5b per month. A number that will likely grow quickly without exports.

Source: American Farm Bureau Federation fb.org

Meanwhile, the prayers of some (many?) real estate industry participants are being answered in the form of higher interest rates. Average contract mortgage rates hit 5.2% last week, and industry observers think they’re going higher. The bottom line is that it costs about 50% more to buy a home now than a year ago. The Mortgage Bankers Association says refi demand is down 68% YOY. A year ago, the 30-year rate was 3.2%.

Rising mortgage interest rates are serving to slow down the market, causing sellers to think about lowering home prices and knocking many first-time home buyers out of the market. At the same time, rents are rising, taking a bigger bite out of the wallet. That will make it much more difficult for first-time buyers to save enough cash to ever buy a home, setting in motion profound repercussions on neighborhoods and communities in the future.

I’m hearing the Recession 2022-23 drumbeat grow louder:

A barrel of oil has been over $100 for months
Inflation is around 9%
Mortgage interest rates are over 5%
Housing prices have been skyrocketing
Supply chains are still upended by the Pandemic and the Ukraine/Russia war is upending key commodity production
A new study found that 43% of employees cite personal debt as their greatest stressor (51% would give up a salary increase for more flexibility in when and where they work) and spend 25% of their time at work worrying about money.

If you’re not prepared for a recession, you might want to start thinking about it.

Existing home warranties are more popular than ever

Last weekend, I published a short piece in the Boston Globe about home warranties. There have been so many innovations in this industry in the 25+ years since I first wrote about them, but in my story research, I learned a few things that were interesting:

First, millions of people are buying home warranties. This includes home buyers, sellers and perhaps most interestingly, homeowners.
You can pick the home warranty package you want with the features that match your home.
You don’t have to buy a year-long contract. You can also buy it by the month. (Although, there may be a 30-day waiting period.)
There’s a belief that if you have an existing home warranty, and something goes wrong in your home, it will get fixed.
This is true, but there’s a price to pay - the cost to bring people out. And, the service people who come out will likely not be familiar with your home. You may also have to wait for that service call (24-48 hours or more) and perhaps weeks for parts. If you need something fixed quickly, your home warranty service number may not be the number to call.
Still, it seems as though homeowners want to have a number to call, where someone, anyone, will come out and address the problem.
Homeowners are outsourcing even the most minute of tasks, such as changing air filters in HVAC systems.

Are we losing the ability to manage and care for our homes’ most basic needs? Or this: How many homeowners does it take to change a lightbulb?

Houses are a lot more complex than they used to be. Your average person can't go down and replace the blower motor on the HVAC and probably shouldn't even attempt that, When I was a kid, I did that with my dad. When I was a kid, my dad would show me how to change the pump on the on the on the dishwasher….People are now starting to embrace this idea that they don't know how to take care of their homes.
Art Chartrand, of counsel to the National Home Service Contract Association

Renting or buying in 2022?

With home prices and rents skyrocketing, wannabe home buyers are weighing whether buying or renting is the right way to go. Seniors on a fixed income are wondering whether it’s in their best interests to rent or buy, and how much it costs to own a home. First-time buyers are wondering whether they’ll ever be able to close on their piece of the American dream.

Given the price of homes these days, coupled with the surge of mortgage interest rates, renting may be in the cards for now:

The median monthly asking rent in the U.S. increased 17% year over year to a record high of $1,940 in March, according to a new report from Redfin.
Meanwhile, the national median monthly mortgage payment for homebuyers rose twice as fast: It climbed 34% year over year to $1,910, also the biggest increase in Redfin’s records.
Point2 found that homes for under $150,000 now make up less than 5% of all homes currently on the market in the most in demand U.S. cities, while the homes under $100,000 are almost non-existent.
Additionally, Point2 found that in 25 of the largest U.S. cities, homes under $150,000 constitute less than 1% of all homes currently available on the market. Five of the most populous cities have zero homes available for $150,000 or less: San Francisco (CA), Irvine (CA), Oakland (CA), Gilbert (AZ), Henderson (NV).
According to the Mortgage Bankers Association, the share of homes in foreclosure decreased to 1.05%.

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This Week in Wealth on 720 WGN Radio

Don’t miss this week’s episode. We’re talking about how to plan for the “Oh, Sh*t” moments in life. 6:30a, Sundays on 720WGN, or listen live at WGNradio.com.

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On a personal note

There’s nothing like clearing your head with a short hike in the San Diego hills, enjoying wildflowers in bloom. Have a good week!

Ilyce