The Fed Paused This Week, But The World Didn't

Is it just me or does it seem like the war escalated fairly quickly this week? It’s crazy to say the war, from my very privileged position standing safely in this office. I have clients who are veterans and who I am praying for daily, as they could be activated very soon here – if they haven’t been already. These are crazy times and I’m going to tie down how all of this is impacting housing over the next few minutes. 

Fed Week 

The Federal Reserve met this week and to no one’s surprise, they left their Federal Funds rate alone – choosing to pause. Markets had pretty much banked on that, but why they chose to pause is important. They aren’t saying everything is fine as is, so let’s leave it alone. They are doing nothing because that’s what they feel is the safest option while staring into “the fog of war.”  The responsible thing for a central bank without clear visibility is to freeze. 

The Economics of War 

As I’m sure you are aware this is not only a geopolitical conflict. We all understand that most of us do not understand the decades of nuance behind the tensions in the Middle East. But we are very clear that this is happening in the Strait of Hormuz, which impacts roughly 20% of the world’s oil supply. Oil prices have spiked as high as $126 a barrel and this has implications beyond the cost of filling up your gas tank. It leads to supply chain shocks and that leads to inflation concerns. For that reason alone, markets are moving based on predictions that rates cuts will not happen as planned this year. 

Just before the war, interest rates had dropped to the mid-5’s. We are now back in the 6’s. Interestingly, this is where all economists – who I don’t think knew this war would happen – have said we will be throughout the year. However, there is definitely concern rates will go higher given these inflation concerns. 

History gives us patterns. 

This is not the first time the world or markets have dealt with war while trying to function economically. I always like to refer back through history and look for patterns. There’s a couple we’ve seen in the past that we should try to follow in the coming weeks and months. (It hurts on multiple levels to type months.)   

Wars are inflationary first. We know that interest rates decline during times of economic uncertainty, like recessions. Historically though, first rates jump on inflation concerns because of oil spikes, supply chain pressure, and government spending. This is the phase we are in right now. It’s hard to say how long this phase lasts without knowing how long the war will go on…I looked back at trends during the most recent oil/supply shock wars (The Yom Kippur War in 1973 or Gulf War in 1990) and saw inflation timelines that looked like an immediate spike during the first 6 months but the peak, the highest inflation reading being 6-18 months in and the cooling period not coming until 2-3 years. If this war stays contained but continues to disrupt oil the way it has been, we should expect front loaded inflation pressure. 

On the other hand if it turns into a prolonged war with heavy government spending on top of the oil shock, like the Iraq/Afghanistan War, the inflation timeline would look more like this just being the ramp up building period (oh god) with the peak happening whenever the middle of the war is and inflation persisting for 7+ years. The Vietnam War was a similar story and contributed to that terribly long inflation cycle of the 70’s. Basically, the longer the war goes, the stickier inflation will get. 

Now let’s talk about something scary, in which inflation causing higher interest rates would be the least of our problems. A full-on global conflict, World War III. Inflation might be controlled during the war through measures from the Fed, or things as extreme as rationing. But it would explode after the war ends and could last decades. For example, during World War II, inflation was suppressed during the actual war but surged once controls were lifted.  

I don’t want to talk about that scenario anymore. So, let’s get back to why any of this matters for your real estate strategy. Historically, war-driven inflation isn’t permanent but it’s also not brief. Most conflicts trigger a sharp inflation spike that plays out over 12 to 36 months, especially when energy markets are disrupted. The timeline is usually front-loaded: prices rise quickly, peak within the first year, and then gradually normalize if the conflict remains contained. So now our prayers have gotten even more specific. 

While most of the content you are consuming is about this recent jump in rates, the real impact isn’t actually the spikes, it’s the delay on where the peak will be. War has a way of pushing out the timeline for lower interest rates because it introduces exactly what central banks hate most: uncertainty paired with inflation risk. We have to pay attention to that but this morning the European Cental Bank and the Bank of England both said they are ready to hike their own rates if this war pushes inflation in their countries any higher.  That is why we are seeing yields across the globe including here at up rising and mortgage bonds are 72 basis points in the red this morning.  That is painful for interest rates. 

What happens to home values during a war? 

That’s the other side of the affordability coin – one side is interest rates, the other is home prices, right? Let’s zoom out, because again, history gives us patterns. During wartime, buyer hesitation increases (understandably) and then transaction volume slows but supply usually stays tight. The market freezes first. I could see this being especially true in today’s environment where we already have a systemic shortage. 

Then you have to consider asset classes. Global conflict leads to a capital flight where the world’s wealth leaves unstable regions and flows to safer assets. Do you know where that money in search of a safer asset lands? The United States housing market. We’ve seen this multiple times so don’t start giving me the side eye. We saw it after the 1970’s oil crisis. We saw it after the Iranian Revolution.  

Boots on the Ground 

Let me tell you what I’m actually seeing as boots on the ground. For the last two weeks my buyers have been in multiple offer situations. Even though interest rates have been trending up. Even though the world is a dumpster fire. And you know I already have a theory about this – people are ready to create stability for themselves.