Sadly, there’s another war taking place, this time Russia’s invasion of neighboring Ukraine.
While it doesn’t involve the United States directly, a dispute between Russia and effectively Europe has sent shock waves across the globe.
Unfortunately, war, or even just a military strike, is not without its consequences. Aside from the human toll, there’s a good chance world economies will also take a knock.
For starters, oil prices have already skyrocketed on supply concerns, as Russia will no longer be a trade partner for most.
As a result, gas prices will likely tick higher, meaning businesses will spend more, and consumers will pay more at the pump. But what about mortgage rates?
War Means Seeking Shelter
- When a war breaks out or threatens to break out
- Most people seek shelter both literally and figuratively
- For investors that means ditching risky stocks and jumping into bonds
- Bonds are considered a safe haven during uncertain times like these
When a war breaks out, or even fears of a war, investors tend to seek shelter for their assets (too), a safe place to earn a return and avoid a collapse.
The obvious place is always bonds, and the number one place to flee from is the stock market. So that’s probably why we saw stocks take a big dive yesterday.
Investors take the “flight-to-quality,” exchanging high-risk stocks for relatively low-risk, safe haven assets like gold and Treasury bonds.
This phenomenon explains why the 10-Year Treasury yield fell from around 2% late last week to as low as 1.685% yesterday, before gaining a bit back today.
Long story short, bond yields and mortgage rates tend to mirror each other in terms of direction, so if yields fall, rates fall, and vice versa.
That is what we’ve seen over the past week or so. Interest rates on the 30-year fixed were nearing 4.25%, perhaps heading to 4.5%, and are now back below 4% again at some lenders.
This is great news for prospective home buyers (and those who decided to float), but it’s bad news for the victims of war and the rest of the world.
It’s also bad news for consumers at large – if rates are heading back down it means things aren’t going as planned for the economy.
War Gives the Fed Pause and Increases Economic Uncertainty
- If and when there is a war or rumblings of one
- The Fed will probably become more dovish and hold off on any rate increases
- So the big rate hikes on the horizon will likely be limited now depending on what transpires
- And if investors are swapping stocks for bonds, there’s a good chance mortgage rates will drop too
Before the war in Ukraine was a trending topic, the Fed grabbed the lion’s share of headlines with its tapering talk and looming rate hikes.
Financial pundits argued about whether the Fed would taper next month or next year, and mortgage rates seemed to take a beating, regardless of the supposed outcome.
But now that there’s actually some uncertainty in the air, and something real to fear again, the Fed may have reason to “keep calm and carry on.”
After all, if this attack does increase the price of oil, and/or put us at odds with Russia and other countries in the region, those economic consequences may become very real.
And because the Fed has to make moves based on the direction of the economy, it may need to delay or reduce any scheduled rate hikes, which could mean lower interest rates, including mortgage rates.
Mortgage Rates Tend to Go Down During War or Major Conflicts
When Russia forcefully annexed Crimea back in early 2014, the 30-year fixed fell about 25 basis points from roughly 4.50% to 4.25%.
Not a major move, or a sustained one, but that event likely pales in comparison to what’s happening now between the two countries.
Rates fell by a similar amount after the United States got involved militarily in the Syrian civil war in September 2014, from 4.25% to just under 4%.
Since the Ukrainian conflict has started, rates have moved by a similar amount, from the 4.25% range to below 4% again.
They basically returned to levels not seen since early February, but remain well above January levels.
It’s possible they could continue to drift lower as the Fed and other investors digest the news.
But Mortgage Rates Are Very Difficult to Predict, Similar to War
Ultimately, rates will be driven by what transpires over the next weeks and months, both in the Ukraine and the wider economy.
If things worsen, the Fed may become even more dovish and hold off on any major rate hikes.
Of course, the Fed and mortgage rates aren’t a perfect science, and the Fed doesn’t directly raise or lower consumer mortgage rates. Period.
At the same time, the Fed won’t want to get caught up in a worsening inflation situation either, especially if the war subsides sooner than expected.
Here’s the thing though – lawmakers at the Capitol were reportedly told that this conflict could last 10, 15, or even 20 years.
Now that could mean learning to live with it, similar to the Cold War, where other economic indicators like inflation take center stage again.
But it will depend on what happens in the interim, and how volatile things become in Ukraine and elsewhere.
If you’re shopping for a home loan, expect a wide range of rates between mortgage lenders, as each may interpret the news differently. In other words, shop around!
Also be careful when locking or floating, as there might be wild swings as developments unfold. In fact, we’ve already seen rates seesaw back above 4%.
Remember, lenders often take their time lowering interest rates out of an abundance of caution, but are happy to raise them at a moment’s notice.
To sum things up, if investors remain skittish and fall back in love with bonds, mortgage rates should decrease, which is good news for at least one group of individuals out there.
Read more: 2022 Mortgage Rate Predictions