The Russian Invasion of Ukraine and Its Effect on U.S. Housing Affordability
BY: Michael Coleman, RBFL Student Editor
What does the Russian invasion of Ukraine have to do with housing affordability in the United States? While perhaps not the proximate cause of rising housing costs, a domino-effect of Vladimir Putin’s quest for hegemony of the Crimean Peninsula and beyond has had considerable impact on much of the inflation we see today in America and worldwide. Responding to the invasion’s effect on global supply chains, in addition to the coronavirus pandemic, American monetary policy has succeeded at reducing inflation in consumer goods. But, as this blog post will discuss, the Federal Reserve has traded this for higher housing costs. Meanwhile, there are more reliable legislative alternatives which don’t make homeownership more out-of-reach for younger generations of Americans.
Russia was the number one exporter of liquefied natural gas (LNG) in 2021. Today, Russian sanctions and Ukrainian port blockages have resulted in food shortages across the planet. These supply chain issues have contributed to drastic levels of inflation in the United States. Prior to 2020, the inflation rate hovered around 2%. When the pandemic hit the U.S., the Federal Reserve Board cut interest rates to 0% to spur the economy. But with such easy, widespread access to money, we have experienced tremendous rates of inflation as demand for goods increased without commensurate increases in supply. June 30, 2022, Russian supply chain issues and low interest rates caused inflation to peak at 9.06% from the previous year. In response, the Federal Reserve has issued nine rate hikes in the past year, most recently on March 23, 2023. Now, the current Federal Funds Rate sits at 4.75-5.00%.
This series of rate hikes has been somewhat effective in mitigating inflation, which as of February 28, 2023, sits at 6.04%. But the practice has had unintended consequences. The current nationwide 30-year mortgage is 6.32%, more than double the low point of 2.65% on January 7, 2021. This has had tremendous impact on the housing market. Here in Boston, between March 2022 and February 2023, monthly home sales are down 53.8% and the average time on the market for a real estate listing increased from 23 days to 56 days. Additionally, 38.3% of homes were sold above asking price last March, compared to only 22.0% this February. Despite this, home prices have stagnated, currently hovering at a median sale price of $739,000. Only now, what was once a monthly mortgage payment of $2,382.31 on that home is now $3,667.05 (assuming buyers make the standard 20% down payment). This translates to a mortgage 53.9% more expensive than a mere two years ago.
To counter inflation without raising housing costs, “market improvement laws” would be more optimal. Three of these include price transparency laws, deregulation in licensing law, and strengthening of antitrust laws. Price transparency laws seek to eliminate the information asymmetry between consumers and producers, who often use inflation as an excuse to raise prices more than their costs actually increased. The laws would, hypothetically, display how much more a product should cost the supplier and how much more the supplier actually priced the item. This would, of course, cause consumers to be less inclined to purchase a product if they were able to compare levels of unjustified mark-up and, consequently, drive down prices to a point where businesses sell at prices which truly reflect their increased costs. Deregulation in licensing law refers to a growing call for less bureaucracy in the form of permits. Most notably, this occurs in occupational licenses, as state licensing laws impact approximately 30% of occupations. Zoning laws and car dealership licensing also are areas for significant future reform. Finally, strengthening antitrust laws would have sizable impact on reducing the effects of inflation, as an estimated 18-37% of increases in prices can be attributed to price-fixing in some capacity.
By addressing disruptive levels of inflation, the Federal Reserve has acted within its authority to raise the Federal Funds Rate and effectively begun to tame rising costs of goods. But, the entities best suited for addressing this trend are not in the Federal Reserve but in legislative bodies, like Congress and state legislatures, who have power to regulate and deregulate certain industries to drive down costs for American consumers.
Sources:
Sönnichsen, Global gas exporting countries 2021, Statista (July 5, 2022),
Historical Inflation Rates: 1914-2022, U.S. Inflation Calculator, https://www.usinflationcalculator.com/inflation/historical-inflation-rates/.
30-Year Fixed Rate Mortgage Average in the United States, St. Louis FRED, https://fred.stlouisfed.org/series/MORTGAGE30US.
Taylor Tepper, Federal Funds Rate History 1990 to 2022, Forbes (Sept. 21, 2022), https://www.forbes.com/advisor/investing/fed-funds-rate-history/.
Boston Housing Market Trends, Redfin (Feb. 28, 2023), https://www.redfin.com/city/1826/MA/Boston/housing-market.
See Rory Van Loo, Inflation, Market Failures, and Algorithms, 5 (July 21, 2022) (unpublished manuscript).
See Mark Kelman, Could Lawyers Stop Recessions? Speculations on Law and Macroeconomics, 45 Stan. L. Rev. 1215, 1259 (1993).
See Morris M. Kleiner & Evgeny Vorotnikov, Analyzing Occupational Licensing Among the States, 52 J. Reg. Econ. 132, 136 (2017).
Francine Lafontaine & Fiona Scott Morton, Markets: State Franchise Laws, Dealer Terminations, and the Auto Crisis, 24 J. Econ. Persp. 233, 240 (2010).
Gillian B. White, How Zoning Laws Exacerbate Inequality, The Atlantic (Nov. 23, 2015), https://www.theatlantic.com/business/archive/2015/11/zoning-laws-and-the-rise-of-economic-inequality/417360/.
John M. Connor & Robert H. Lande, The Size of Cartel Overcharges: Implications for U.S. and EU Fining Policies, 51 Antitrust Bull. 983, 983 (2006).