Mortgage rates climb as markets reprice inflation risk
The war in Iran is starting to show up in a place American households feel quickly: the cost of buying a home. The average 30-year fixed mortgage rate rose to 6.22% this week, up from 6.11% the week prior, marking the highest level since early December. The increase reflects renewed inflation concerns moving through financial markets as energy prices jump amid the conflict.
The timing is awkward for the housing market. Less than a month ago, mortgage rates had dipped below 6% for the first time in more than three years, a psychological threshold that some analysts believed could help revive demand ahead of the spring homebuying season. Since then, the US Israeli war on Iran, which began in late February, has contributed to a spike in energy prices and a shift in investor expectations.
Why the Iran war affects home loans
Mortgage rates tend to move with the US 10-year Treasury yield, which reflects how investors see future inflation and economic growth. This week, the 10-year yield hovered near its highest level in almost two months after briefly reaching its highest point since August. It has risen from about 3.96% before the war began to roughly 4.28% this week.
The climb suggests investors are concerned that higher oil prices could push inflation back up, or keep it sticky for longer. That matters because inflation expectations influence bond yields, and bond yields influence the borrowing costs banks set on mortgages.
Early signs of pressure on spring demand
Higher rates may already be cooling activity. The Mortgage Bankers Association reported that mortgage applications fell 10% last week. MBA CEO Bob Broeksmit said it is still unclear whether the rate pressure tied to Middle East tensions will meaningfully weaken what is typically a strong seasonal period for home sales, but the risk is now on the table.
Fed policy expectations get more complicated
Before the conflict, many investors were positioning for the Federal Reserve to cut rates again, a shift that could have eased mortgage costs. But an energy driven inflation risk makes rate cuts harder to justify. On Wednesday, Fed Chair Jerome Powell underscored that the Fed remains focused on getting inflation back to its 2% target, warning that the economy is now facing another potential shock on top of recent disruptions.
Inflation has cooled from its 2022 peak, but it remains above target. The Personal Consumption Expenditures price index was up 2.8% in January, keeping policymakers cautious as markets weigh how long the energy shock could last.
