Here's How the Middle East War Could Impact Your Mortgage Rate

The average 30-year fixed mortgage rate fell below 6% in recent weeks, the first time it dipped below that threshold in more than three years, giving prospective homebuyers hope that the price of homeownership was finally coming within reach and the housing industry hope that the long-frozen housing market might begin to thaw.

Unfortunately, that lower rate didn't last long, and rates are now headed back up. The 30-year fixed-rate mortgage -- the standard home loan for most Americans -- dropped to 5.98% in the last days of February, after hovering at or above 7% for several years. But the mortgage rate has now risen for two weeks in a row and is back up to 6.11%. Last week saw the biggest increase in the 30-year rate in a year.

What happened? Basically, a war broke out in the Middle East on Feb. 27.

Image source: Getty Images.

As I wrote on March 6 , until the war broke out, investors were beginning to anticipate as many as three quarter-point rate cuts this year from the Federal Reserve as inflation stabilized and signs of cracks in the labor market appeared. That sent the yield on the 10-year Treasury security down below 4%, as investors rushed to buy Treasury securities and lock in current yields before they decline (bond yields move in the opposite direction from prices).

And mortgage rates track the 10-year yield, so they fell too, to a three-year low.

Expectations for rate cuts in 2026 have fallen to zero

But as oil prices began to soar due to the war and the resulting blockage of the Strait of Hormuz, concerns about inflation began to rise again. And higher inflation ties the Fed's hands on rate cuts. Now, futures markets expect no cuts this year. Not three or two cuts. Not one. None.

As a result, the yield on 10-year Treasury securities has risen from 3.94% on Feb. 27 to 4.27% as I write this on March 12 -- hence, the reversal of the downward trend in mortgage rates. That's taking a toll on homebuilder stocks like Lennar (NYSE: LEN) and PulteGroup (NYSE: PHM), as well as home improvement stocks like Home Depot (NYSE: HD) and Lowe's (NYSE: LOW).

If oil prices remain elevated -- a barrel of Brent crude now trades at more than $101 -- or go higher, demand for Treasury securities should taper off even more, taking yields higher and mortgage rates with them.

That could change, of course, if the labor market begins to weaken dramatically. It's already slowed this year, but at the moment it looks as if inflation is the Fed's main concern. A recession or a spike in unemployment could again increase the likelihood of rate cuts this year. But that would be a mixed blessing, at best, for markets and investors.

The Motley Fool has a disclosure policy.