Iran conflict disrupts oil supplies, driving up US mortgage rates
Thirty-year fixed mortgage rates have climbed to 6.46 per cent as energy costs rise, prompting the central bank to pause rate cuts and exacerbating affordability challenges for buyers.
The cost of borrowing for American homebuyers has climbed, with the average rate on a 30-year fixed mortgage rising to 6.46 per cent, up from 6.32 per cent a month ago. The increase is driven by geopolitical tensions involving Iran that have disrupted oil supplies and raised energy costs, creating inflationary pressures that complicate the outlook for the housing market.
The conflict has disrupted oil-related product supplies, including gasoline, causing prices to rise and prompting the Federal Reserve to pause rate cuts. The central bank is currently holding the benchmark federal funds rate steady at 3.50 to 3.75 per cent. While mortgage rates are not entirely determined by the Fed, they are closely tied to its policy stance, and rising energy costs increase the likelihood of future rate hikes if inflation rises.
According to the Cato Institute, the Iran conflict represents the fourth significant supply shock in five years. Historical patterns suggest the Fed tends to assess, equivocate, and delay during such periods. However, market expectations have shifted, with some anticipating rate increases if the consumer price index approaches 5 per cent, a scenario made more plausible by rising diesel and transport costs being passed through to consumers.
The housing market is simultaneously facing a supply crunch. Many existing homeowners are sitting on mortgage rates as low as 3 per cent and are reluctant to sell, as replacing that debt in the current environment would significantly increase their monthly costs. This lock-in effect is reducing available inventory, further tightening a market where younger generations already face affordability challenges compared to previous cohorts.
Compounding the regulatory environment, the US Justice Department has closed a criminal probe into Federal Reserve Chair Jerome Powell regarding cost overruns on the central bank’s Washington headquarters renovations. The matter has been transferred to the Federal Reserve’s Office of the Inspector General, marking a separate development in the oversight of the institution managing the current monetary policy.
