How the Iran War Is Driving a Spike in Mortgage Rates Above 6.22% — And What Comes Next

Landing a decent borrowing rate is a lot like finding a needle in a haystack. We’re dealing with a market that’s strained by high inflation risk and tight monetary policy, and so good deals are getting hard to come by. Well, those deals are going to be even fewer and far between thanks to the war in Iran.

Everybody knows that inflation influences borrowing costs. But one factor investors haven’t been pricing into mortgage rates is geopolitics. Since the conflict began a few weeks ago, U.S. mortgage rates have spiked above 6.22%. We’ve not seen rates like that in a while, and it’s a painful reminder that geopolitical stress can have major ripple effects on the everyday economy.

This probably isn’t news to you if you like tracking Treasury yields. The telltale signs are all there, and those climbing yields are the key link between war in the Middle East and your mortgage repayments. 

But if you’re not a market watcher, chances are you’re wondering what on earth is happening and when rates are going to come back down.

Unfortunately, the answers aren’t clear-cut.

Why Are Mortgage Rates Wired to Treasury Yields?

Before we start talking about the war, it’s worth pumping the brakes to take a look at how mortgage rates actually work.

You’d be forgiven for thinking the interest rates that banks offer on mortgage deals are based on the Federal Reserve’s monetary policy. But mortgage rates are really priced alongside government debt — particularly the 10‑year Treasury ($TNX). That’s because bonds and mortgages are much more closely aligned to one another in terms of risk profile and duration than they are to overnight borrowing rates.

As a result, lenders tend to raise mortgage rates every time Treasuries go up to manage that duration risk and protect their margins. 

So, what does a war in the Middle East have to do with any of this?

Treasury bonds are a safe-haven asset. Investors buy up treasuries when they get scared. But because the Iran war is contributing to a wider global risk premium, yields are actually getting pushed up alongside demand.

A lot of that pressure comes from oil prices. This ongoing standoff in the Strait of Hormuz has led to fears of supply disruption. Traders are now pricing in a sustained increase in the cost of energy, which feeds directly into inflation rates. Bonds hate inflation, and so treasury yields generally go up alongside it because holders want to be compensated for their lack of purchasing power.

That’s where we’re sitting right now. Federal Reserve Economic Data places the current 30-year mortgage rate at 6.22% — and with no end to this conflict in sight, it doesn’t look like mortgage rates are going to drop any time soon.

Why Does This Mean for the Housing Market?

This rate hike isn’t just a headline number. It’s a significant change for a lot of families that damages affordability and will have serious impacts on demand for housing here in America.

The first impact we’re going to see is a jump in monthly payments. For every percentage point your mortgage rate increases, you’re losing thousands of dollars in purchasing power. That not only hurts your position as a buyer, but it also scales back the size and the number of offers sellers can expect.

There’s also going to be a big pullback on refinancing. Anybody who’s already locked in below 6% has lost all incentive to refinance. That’s good news for their monthly budget, but it also shrinks the market’s pool of mortgage originations. Translation: Banks are going to feel an income squeeze, which means credit expansion slows down everywhere else.

As a result of all that, you can expect the market to cool a lot over the next quarter. Prices can only remain sticky up to a point, and higher rates means lower affordability. That translates to limited price growth, more time on the market, and lower turnover.

But the million dollar question here is: How high are rates going to climb?

It’s hard to say without a crystal ball, but there are a couple competing forces that you should be keeping an eye on.

First, there’s geopolitical risk. The war in Iran feeds uncertainty, and so markets will continue to price in disruptions to energy and monetary policy. That affects bond prices, which will continue to put pressure on mortgage rates. If we do start to see a glimmer of hope that this conflict is drawing to a close, that means Treasuries and mortgage interest will hopefully decline, too.

Next, there’s monetary policy. The Federal Reserve’s rate decisions aren’t directly linked to mortgage rates, but those decisions are driven largely by core inflation. If inflation expectations remain elevated, bond yields will remain elevated. So the quicker inflation gets under control, the quicker you can expect mortgage lenders to reduce their rates.

At the end of the day, this is the stuff you should be keeping an eye on if you’re looking to buy a home or invest in real estate. It seems pretty unfair, but your mortgage rate is always a reflection of uncertainty — whether it’s geopolitics, inflation, central bank policy, or all of the above. Right now, markets are still trying to figure out how much uncertainty there is to deal with. And until they figure that out, mortgage rates are probably going to stay right where they’re at.