The U.S. housing market is facing new challenges as the average 30-year fixed-rate mortgage climbed to 6.66% this week, marking the highest point in a year. This increase comes as geopolitical tensions in the Middle East and rising oil prices create ripple effects across the global economy.
For prospective homebuyers, this news brings renewed concerns about affordability. The 6.66% figure, while not as high as the 6.72% seen at the end of last July, still represents a significant hurdle for those looking to enter the housing market.
The Iran Conflict and Its Impact on Mortgage Rates
The recent escalation of the conflict with Iran and the closure of the Strait of Hormuz have had a profound impact on global oil prices. As oil prices rise, so do shipping costs, which in turn drive up the prices of goods across the board. This inflationary pressure has pushed up the yield on the 10-year Treasury note a key indicator that mortgage rates closely follow.
Kara Ng senior economist at Zillow explains the connection: “Oil prices always swing mortgage rates. You get a real-time read every time you go to a gas pump about what it means to buy a home.” With the average price of a gallon of regular gasoline now at $4.10 up from $3.00 before the war began, the impact on mortgage rates is clear.
The Role of the Federal Reserve
Adding to the uncertainty, the Federal Reserve signaled on Wednesday that an interest rate hike could be on the horizon in September, even as it kept its benchmark interest rate steady for now. Three members of the rate-setting committee voted for a hike, a rare split that has markets anticipating higher rates in the near future.
Kate Wood a housing expert for NerdWallet notes that the ongoing pauses and restarts of the fighting in Iran have left investors wary. “The best bet would be a decisive, conclusive, actually-sticks end to fighting in Iran,” she says. “But markets might be a little bit once bitten, twice shy.”
The Housing Market Stagnation
The combination of high mortgage rates and elevated home prices has contributed to a sluggish housing market. According to the National Association of Realtors sales have barely moved over the last three years. In June, the average existing home sold for more than $440,000 with sales declining 2.4% from a year earlier.
The upward trend in mortgage rates has also led to a decline in mortgage applications. Last week, applications fell 6.4% from the previous week, according to the Mortgage Bankers Association. Bob Broeksmit MBA CEO, highlights the challenge: “Elevated borrowing costs remain a challenge this summer for many prospective homebuyers.”
As the housing market continues to navigate these challenges, the path to lower mortgage rates remains uncertain. Anthony Smith senior economist at points out that “With the Fed signaling that its next move is more likely a hike than a cut, near-term rate relief looks unlikely.” The clearest path back toward lower rates would be a de-escalation of the conflict and a reopening of the Strait of Hormuz.
