As if mortgage rates didn’t have enough problems lately, now they’ve got the threat of rising oil prices.
And the inflation that could come with them, further pushing out any expected mortgage rate relief.
While the price of oil has eased a bit after spiking Friday due to the Israel-Iran conflict, it could exacerbate an already difficult global economic situation.
Coupled with the uncertainty of tariffs, the Fed will have an even more difficult assignment on their hands.
The result might be elevated-for-longer bond yields and no Fed rate cuts this year if things get worse.
More Uncertainty for Mortgage Rates Due to the Middle East Conflict
The keyword lately has been uncertainty. Ever since Trump won the election and the trade war got underway, the Fed has been in a veritable holding pattern.
The constant flip-flopping on trade and tariffs has made economic projections extremely difficult for them and everyone else.
And that means monetary policy is basically stuck, even if the (cooler) data supports lower interest rates.
As such, the 30-year fixed has been hovering closer to 7% than 6% ever since Trump got into office.
On Friday, yet another layer of uncertainty was added to the list after Israel struck oil facilities in Iran.
While outright war could actually lead to Fed rate cuts if the economy falls into a dire situation, a more likely scenario is just more inflation.
Higher oil prices are inflationary and if they stay elevated, consumers will pay the price, literally.
One nice thing that was working for inflation lately was lower oil prices, but now they’re under pressure to move higher again.
Combined with the tariffs, we might see inflation readings creep back up, stalling and even reversing all the progress on that front.
If it sounds familiar, it’s because this wouldn’t be the first time this happened. In fact, a similar event (energy crisis) took place in the 1970s, causing inflation to spike.
That’s also when mortgage rates happened to hit all-time highs in the 1980s, with the 30-year fixed surging to 18.45% in 1981.
I’m not saying we’re going anywhere close to those levels, or even higher from current levels, but there is additional upside risk to mortgage rates again because of this conflict.
More Unknowns Mean Interest Rates Will Struggle to Come Down Anytime Soon
At the moment, the Israel-Iran conflict is a very fluid situation and while some pundits are already kind of shrugging and moving on, it has the potential to get a lot worse.
Even if it doesn’t, it’s yet another issue now lingering in the background and not providing any help to bond yields and by extension mortgage rates.
Sometimes wars and conflicts can actually help mortgage rates because of the perceived flight to safety from stocks into bonds.
When more money moves into bonds, their price goes up and associated yields (interest rates) go down. It’s an inverse relationship.
But lately nothing has seemed to help bond yields, even if it historically might. They seem to go up whether it’s good news or bad news as traders play lots of defense.
In a nutshell, mortgage rates might not actually get much worse because of this, but this development also means they won’t get much better either.
Similar to the tariffs, the unknowns mean we have to wait longer for any relief. We have to wait to see what happens with the economic data, if anything at all.
And unfortunately, when you look at the timing, that means the 2025 home buying season is going to be another swing and miss.
It’s already June and we won’t know for months what the impacts of all these things will be.
More importantly, the Fed won’t know either, and will be happy to take its time, even if the economic data tells a different story.
Long story short, another headwind, another reason the 30-year fixed can hang out closer to 7% than 6%.
And another reason prospective home buyers can sit on their hands or make below-list offers with little urgency.
However, if you zoom out, mortgage rates are still expected to move lower. Yes, I keep repeating this line, but it’s true. It’s just that this reality keeps getting pushed further out.
Read on: How are mortgage rates determined?
Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 19 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on X for hot takes.