Iran disputed reports it was negotiating a deal to end the ongoing conflict and oil prices moved higher, putting upward pressure on 10-year Treasury yields
This article was updated on Thursday, March 26 at 9:00 a.m. ET.
Mortgage rates spiked again last week as the Iran war raged on, throwing fresh doubt over the spring housing market outlook and bringing borrowing costs sharply higher.
The 30-year fixed rate has shot back towards the mid-sixes, climbing to 6.43% for the week ending March 20, according to the Mortgage Bankers Association’s (MBA) latest applications survey.
That’s poured cold water over the brief uptick in optimism that arrived earlier in the year when rates dipped below the 6% mark. In less than a month, the 30-year fixed average has now ballooned by more than 30 basis points, stirring fears that it could move even higher in the event of a protracted conflict.
And a brief Wednesday drop in 10-year US Treasury yields, one of the main drivers of fixed mortgage rates, proved short-lived. Those yields began to fall as news emerged of reported negotiations between Washington and Tehran to reach a deal, but reversed course when Iran disputed those rumors and oil prices started to climb again.
Yields ended Tuesday at 4.369% and slipped as low as 4.323% on Wednesday afternoon, but had ticked back up to 4.375% at time of writing.
With experts sounding the alarm on the potentially ruinous impact of a drawn-out conflict on inflation, supply chains and the global economy, news of a possible de-escalation was warmly greeted by financial markets as stocks briefly rallied. But Iran's dismissal of claims by President Trump that it was negotiating a peace deal put upward pressure on yields once more.
The outbreak of war has cast the prospect of Federal Reserve rate cuts – which don’t directly move mortgage rates, but influence the movement of bond yields – into question.
The central bank left rates unchanged in its second deliberation of the year last week, holding steady but also upping its inflation forecast over what it described as the “uncertain” outcome of the war.
Analysts split on rate path ahead
Fed members including Stephen Miran, an appointee of President Trump, still favor rate cuts in 2026. But others, such as Chicago Fed president Austan Goolsbee, say potentially rising inflation should be a bigger priority for the central bank than a weakening labor market.
Still, the long-term impact of inflation concerns shouldn’t be overstated – and last week, markets were skeptical of lasting damage caused by the war.
John Canavan, lead analyst at Oxford Economics, told Mortgage Professional America markets’ expectations for short- and long-term inflation varied significantly.
“There’s obviously been a very large shift in the inflation outlook over the next couple of years due to what’s going on with oil,” he said. “There’s only been a modest increase in inflation expectations out to five years.
“The market is still viewing inflation as just a short-term, one-off, oil-driven factor. In fact, if you take a look at inflation expectations from five years through 10 years, inflation expectations have been declining over the past month or month and a half through all of this broader increase in oil prices.”
Canavan still doesn’t see mortgage rates necessarily spiking even in the event of a longer war than currently expected.
“Markets are already in some ways positioning for the risk of somewhat slower economic growth holding down long-term inflation,” he said, “which is why I could see that the broader psychology could turn in that direction as well if the rise in oil prices were to be seen as more significantly impacting the global economy than we currently expect.”
Housing market takes a hit
The economic uncertainty caused by the war still appears to be hindering the housing market’s prospects as brokers, lenders and borrowers gear up for spring.
Rob McGibney, chief executive officer of homebuilding giant KB Home, told analysts on the company’s earnings call on Tuesday that the conflict had had a negative impact on its performance in recent weeks.
“This conflict in the Middle East started right at the end of February, and we saw pretty good sales results in the first week of March,” he said. “But the last couple of weeks have been a little softer than what we would like to see or what we normally get this time of year.
“We just don’t have a lot of visibility right now as I don’t think anybody does into how long this conflict may go on and how it’s going to impact consumer psyche and confidence. But we feel that right now, it’s weighing on the consumer.”
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