Iran War’s Impact on US Mortgage Rates: What Homebuyers Need to Know
The conflict in the Middle East, particularly the recent strikes involving Iran and Israel, has introduced fresh volatility into the U.S. Housing market, primarily through rising mortgage rates. While the market had begun to show signs of a potential “reset” with rates falling below 6% in February 2026, geopolitical tensions have reversed this trend, impacting affordability and buyer sentiment.
Mortgage Rate Increases and Market Reaction
Prior to the recent military actions, the average rate for a 30-year fixed mortgage stood at 5.98% on February 26, 2026, reaching a four-year low. Yet, following the U.S.-Israel strikes on Iran, rates climbed to approximately 6.5% as of March 25, 2026. CNBC reports that economists predict continued fluctuations throughout the year if the conflict persists.
This increase in rates has already cooled demand. Mortgage applications to purchase a home dropped 5% the week ending March 22, 2026, according to the Mortgage Bankers Association.
Impact on Home Sales Forecasts
Zillow initially forecasted a 4.3% increase in existing home sales for 2026 compared to the previous year, anticipating a market recovery. However, the escalating tensions and subsequent rise in mortgage rates have complicated this outlook.
Zillow’s chief economist, Mischa Fisher, has revised forecasts based on different scenarios:
- Scenario 1 (Conflict ends April 1): Home sales increase by 3.48% year-over-year.
- Scenario 2 (Conflict ends July 1): Home sales increase by 2.33% year-over-year.
- Scenario 3 (Conflict ends September 1): Home sales increase by 1.21% year-over-year.
- Scenario 4 (Rates 50 bps higher, unemployment up 20 bps for the rest of 2026): Home sales decline by 0.73%.
New Construction and Existing Home Inventory
The effects of the increased uncertainty are already visible in the new construction market. KB Home lowered its full-year forecast after reporting disappointing quarterly earnings, citing the conflict in the Middle East as a contributing factor. KB Home Chairman Jeff Mezger noted that the conflict added “another layer of uncertainty” for consumers.
Inventory is rising on both the new and existing home fronts, with builders holding a high supply of homes and the number of sellers exceeding buyers by approximately 600,000, according to Redfin – a near-record gap. Contract cancellations are also on the rise, reaching the highest level since 2017, with roughly 1 in 7 homes under contract being canceled in February.
The Role of Oil Prices and Inflation
The primary driver connecting the Iran war to mortgage rates is the surge in oil prices. Oil prices climbed to $119.48 per barrel on March 9, 2026, exceeding $100 for the first time since the Russian invasion of Ukraine in 2022. RefiGuide explains that rising oil prices fuel inflation fears, leading investors to sell bonds and pushing Treasury yields higher. Since mortgage rates closely follow the 10-year Treasury yield, this results in increased borrowing costs for homebuyers.
Buying Power and Affordability
Despite the increase in mortgage rates, buyers still possess more purchasing power than they did a year ago. Better.com highlights that current rates, while higher than the recent low of 5.98%, still offer approximately $30,000 more buying power compared to the same period in 2025.
Looking Ahead
The U.S. Housing market remains in a precarious position, balancing long-term improvements with short-term instability. The duration and escalation of the conflict in the Middle East will be key determinants of future mortgage rate movements and the overall health of the housing market. Jake Krimmel, senior economist at Realtor.com, notes the market is “caught between long-term improvements and sudden short-term instability.”
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