Slowdown in the U.S. housing market could accelerate recession heading into 2023, with existing home sales dropping 7.7% in November to the lowest level since May 2020. Slumping real estate market could drag the economy into recession, as many homeowners find it more difficult to leverage equity to keep paying mortgages and other recurring expenses. Federal Reserved Board’s aggressive increase in rate hikes has slowed the nationwide real estate market, driving many first-time buyers out of the market. Mortgage interest rates have more that doubled in the last year, corresponding to the 10-month-old Ukraine War. President Joe Biden, 80, sees no link between the Ukraine War and a runaway inflation started when Biden boycotted Russian oil in March. Inflation has swept across the world, largely driven by runaway energy prices from the Russian oil embargo.
When it comes to the U.S. economy, the Federal Reserve Board has targeted runaway inflation, hiking the federal funds rate to 4.5%. Before the war started Feb. 24, the Federal Funds Rate, the rate lent by the Fed to U.S. banks, was at 0.25%, essentially giving consumers, including home buyers, the lowest rates in a generation. Less than a year into the war, 69-year-old Fed Chairman Jay Powell has pumped the breaks, tightening rate and the money supply, all to help control inflation. Biden doesn’t see what he’s done to fuel the worst inflation in 40 years, reminiscent of the early 80s when the prime interest rate hit 21%. Today’s prime interest rate, the rate banks lend to top credit customers, is at 7.5%, low by historic standards, but high enough to punish consumers looking to by any commodity, especially big ticket items like cars and major appliances.
Real estate slow downs are particularly harmful to the Gross Domestic Product [GDP], because consumers rely on home equity loans for purchases. As rates continue to rise, existing home sales are expected to tumble. Home sales have already dropped 35.4% on a year-on-year basis, spelling economic problems going forward. Fed governors hint that a moderation in interest rate hikes could happen in 2023, depending of course on core inflation. Whatever post-pandemic bounce did for real estate sales, it’s all but disappeared, with the average nationwide mortgage rate now at 6.3%. National Association of Real Estate sees the same trend happening in 2023, unless the Fed stops its tightening cycle. Whatever sellers market existed two years ago, buyers find tight inventories but a slow drop in prices, especially for transactions requiring conventional financing.
Visiting the White House and Congress today, Ukraine’s 44-year-old president comes to Washington asking for more cash-and-arms, expecting Biden to provide another $1.9 billion in military aid. Zelensky comes to Washington to ask for more cash-and-weapons, not to offer anything in the way of a peace plan. He doesn’t know or understand the havoc played on the U.S. economy and real estate markets in the U.S. and overseas to the Ukraine War. Fed Chairman Jay Powell has said that he has no control over geopolitical crises, other than using the Fed’s tools to deal with inflation, largely hiking interest rates. If Biden and Zelensky continue to escalate the war, giving Ukraine Patriot Missile Batteries, how’s that supposed to help the U.S. and world economy? All indications point to more trouble ahead in Ukraine, continuing to fuel U.S. and foreign inflation in economic markets.
If you try to bet on the future in 2023, it looks like more of the same in 2022, with a U.S. president determined to keep a bloody proxy war going in Ukraine. Zelensky has no message of peace for a joint session of the U.S. Congress, only continuing to fight the Russian Federation. Wall Street has been selling off recent bear market gains but gets no reassurance that anything will change in the year ahead. Whether admitted to or not, the world—and U.S.—need Russian oil or a means to replace it, to lower the current inflation rate of over 8%. Lower energy prices would be the most helpful thing to bring down current interest rates promising to choke off consumers spending, including the real estate market. As inflation goes, so do rising interest rates, all based on rising costs at every point in the economic chain. It’s hard to lower interest rates when energy and consumers prices continue to rise.
Biden could do the best thing to help inflation by pushing Zelensky into peace talks with the Russian Federation, even if it means Ukraine must make concessions. Whatever Zelensky says to a joint session of Congress, it won’t help U.S. financial markets unless he’s open to peace talks, which he isn’t. Because Biden controls the purse strings, you’d think he’d understand the effect of keeping the war going. When the House changes hands Jan. 3, 2023, more opposition to the Ukraine War will be voiced. Zelensky can milk the anti-Russian sentiment on Capitol Hill to his advantage but not to help the struggling U.S. economy. As long as the world is on a war footing, financial markets remain jittery, with central bankers hiking interest rates. One miscalculation, one mishap, one mistake in Ukraine escalating the war would drive interest rates higher, leading to recession in 2023.
About the Author
John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He’s editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.
