The ongoing conflict with Iran has had negative effects on the US housing market, as mortgage interest rates have sharply increased. Just one day before the onset of military strikes, the interest rates on 30-year fixed loans were at 5.99%, but they are now approaching 6.5%. This sudden spike in rates has diminished buyers' purchasing power, affecting recovery expectations in the market.
Prior to the outbreak of war, forecasts indicated an improvement in the housing market, with declining interest rates and shrinking home prices contributing to an increase in the supply of homes for sale. However, the recent rise in interest rates has led to a 5% decrease in mortgage applications for home purchases compared to the previous week, according to the Mortgage Bankers Association.
Event Details
In a recent report, Zillow projected a 4.3% increase in existing home sales this year compared to last year. However, Zillow's chief economist, Misha Fisher, noted that the unstable economic situation, including rising energy prices and inflation concerns, has added new complexities to the forecasts. If the current situation persists until the end of April, home sales are expected to rise by 3.48%, but if it continues until July 1, this figure will drop to 2.33%, and if it extends until September 1, it may fall to 1.21%.
If interest rates continue to rise by 50 basis points, coupled with a 20 basis point increase in the unemployment rate, forecasts indicate a 0.73% decline in home sales.
Background & Context
The US housing market has undergone significant changes in recent years, with an increase in demand for homes following a period of stagnation. However, geopolitical tensions, including conflicts in the Middle East, have led to increased economic uncertainty. Since the beginning of the conflict in February, these tensions have added a new layer of complexity to the market, affecting the decisions of both buyers and sellers.
Before the war began, contract cancellation rates were at their highest levels since 2017, with approximately 13.7% of contracted homes being canceled in February, compared to 12.8% the previous year. This indicates that buyers have become more cautious in their decisions, giving them the upper hand in the market.
Impact & Consequences
Construction companies have also been significantly affected, as KB Home lowered its full-year forecasts after reporting disappointing quarterly results. The company's president, Jeff Mezger, noted that consumers have faced a range of challenges over the past two years, and the conflict in the Middle East has added a new layer of uncertainty. With an increase in the supply of homes, the market is in an unstable position, with over 600,000 more sellers than buyers.
As the market approaches the peak selling season, it appears to be caught between long-term improvements and short-term instability. This situation could lead to price volatility and complicate decision-making for both buyers and sellers.
Regional Significance
The Arab region is directly affected by the ongoing events in the Middle East, as the conflict with Iran may lead to rising oil prices, impacting Arab economies. Additionally, rising interest rates in the United States could affect Arab investments in the US market, further complicating the economic situation in the region.
In conclusion, the ongoing events in the Middle East, particularly the conflict with Iran, have far-reaching implications for the US economy and housing market, raising concerns for both buyers and sellers alike.