For homebuyers, an unexpected cost of the Iran war has been higher mortgage interest rates. The typical rate on a 30-year purchase mortgage is about a half-point higher now — during the crucial spring and summer homebuying season — than it was before the U.S. attacked Iran.
And now, an imminent end to the war could be good news for mortgage borrowers.
After more than 100 days of war, the White House declared in a post on Truth Social that the peace deal with Iran was “complete” on Sunday. Although the president has announced that an end to the war was around the corner dozens of times, this declaration has the backing of Iranian leaders, too.
When markets opened on Monday, oil prices dropped, a trend that continued on Tuesday. Ten-year Treasury yields also fell both days, which could lead to lower mortgage rates.
How and Why the Iran War Has Impacted Mortgage Rates
The war in Iran triggered a global price shock as the Strait of Hormuz, which handles a fifth of the world’s oil, remained effectively closed for more than three months. When oil is more expensive, it reverberates throughout the entire economy, making things costlier to manufacture and transport.
The impact of the war is being felt in the data. Inflation rose by 4.2% annually in May, per the Bureau of Labor Statistics’ consumer price index, which is the fastest pace in three years. Notably, the energy index, which tracks price changes in consumer energy goods such as gas and fuel oil, rose by 23.5% year-over-year.
Inflation matters for interest rates. Mortgage rates in particular track the yield on 10-year Treasury bonds, and bond investors demand higher yields when inflation is high. The bond market also moves in response to the Federal Reserve’s monetary policy, and with inflation rearing its ugly head, it’s likely that the central bank’s next move will be a rate hike rather than a cut.
The 30-year fixed mortgage rate was under 6% before President Donald Trump ordered U.S. troops to attack Iran in late February, according to data from Freddie Mac. In the months since then, rates have eclipsed 6.5%. Now with an end to the war in sight, those inflationary pressures can subside. And hopefully, mortgage rates can decrease, too — although it’s unclear if rates will fall to their prewar levels.
For one, the war was expensive. An increased supply of Treasury bonds to finance the Middle East conflict caused bond prices to drop and, conversely, yields to rise. This deficit spending is likely to keep bond yields elevated, and interest rates tend to rise faster than they fall.
On top of that, recent jobs reports over the past few months show that the labor market is more resilient than originally thought. The U.S. added 172,000 jobs in May, per BLS data, outpacing economists’ expectations.
When it comes to the Federal Reserve’s monetary policy, which impacts bond yields and ultimately moves mortgage rates, the central bank has a dual mandate: maintain maximum employment and stable consumer prices. Ending the war may resolve one half of the equation, but interest rates are likely to stay elevated as long as U.S. employment is strong.
In the wake of the peace deal announcement, 10-year Treasury yields decreased slightly. That gives 30-year mortgage rates room to move downward, which is welcome news to homebuyers who are struggling with affordability during the peak spring season.
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Iran Peace Agreement Offers Hope for Lower Mortgage Rates This Spring originally appeared on usnews.com
