Iran War Triggers Spike in U.S. Mortgage Rates, Housing Market Under Pressure

The Iran conflict is causing significant turmoil in world financial markets, with the U.S. housing market now facing repercussions.

In the last couple of weeks, mortgage rates have increased dramatically due to increasing concerns about inflation, unstable bond markets, and skyrocketing oil prices tied to the growing geopolitical conflict. 

What initially seemed to be a solid period of recovery for the housing market in early 2026 now faces new uncertainty as increased borrowing costs and decreased buyer confidence are beginning to impact demand.

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Mortgage Rates Rise to Multi-Month Highs

The U.S. mortgage rates have dramatically risen over the last couple of weeks, reaching their highest level in months.

The typical 30-year fixed mortgage rate has recently reached about 6.43 percent, making it one of the largest weekly increases since April 2025.

This increase is closely related to the rising 10-year Treasury yield, which has risen dramatically based on concerns over inflation. 

As oil prices drastically increased due to issues in the Iran conflict, driven in large part by disruptions in supply, the markets have begun to anticipate increased inflation and significantly fewer chances of rate cuts this year.

How is the Iran War Driving Borrowing Costs?

The increase in mortgage rates can be traced back to the increase in crude oil prices that have occurred due to the Iran war.

The chain reaction that links mortgage rates to the higher crude oil price begins with the fact that, as tensions in the Middle East, Iran, specifically, continue to grow, the price of crude oil is expected to increase. 

Higher crude oil prices will drive inflation expectations higher, which will increase bond yields, which drive mortgage rates.

The expectation before the Iran war was that by 2026, borrowing costs would drop; however, with the increase in crude oil prices, it is now expected that the Federal Reserve will continue to hold rates high longer, thus tightening financial conditions.

Housing Market Overall Demand Decline

Due to the increase in mortgage rates, housing demand has already started to decline. The number of mortgage applications has dramatically decreased, and refinancing activity has also decreased.

The combination of the higher borrowing costs has made home ownership less affordable, but not only do some potential home buyers now feel discouraged because of the potential for higher borrowing costs, but even a small increase in rates has caused large increases in monthly payments, thus pushing many first-time home buyers out of the market.