Iran War Cools US Housing Market: Mortgage Rates Rise, Sales Forecasts Cut

Mortgage Rates Climb, Cooling Housing Market Amidst Iran Conflict

The escalating conflict in Iran is already sending ripples through the U.S. Economy, and the housing market is feeling the immediate effects. A sharp increase in mortgage rates, triggered by concerns over inflation and potential economic instability, is beginning to curtail what was anticipated to be a strengthening housing market. Just days before the strikes began, the average rate for a 30-year fixed mortgage stood at 5.99%, according to Mortgage News Daily. As of today, that rate has risen to around 6.5%, a significant jump that’s already impacting buyer behavior.

The timing couldn’t be worse. Prior to the outbreak of hostilities, conditions were beginning to favor potential homebuyers. Mortgage rates were trending downward, home price appreciation was slowing, and the supply of homes for sale was increasing. This combination offered a glimmer of hope for improved affordability after a prolonged period of a tight and expensive market. Yet, the recent surge in interest rates is reversing that trend.

Mortgage Demand Drops as Rates Rise

The impact on demand is already visible. The Mortgage Bankers Association reported a 5% drop in mortgage applications to purchase a home last week, directly correlating with the rise in interest rates. This decline signals a cooling effect on the market, as potential buyers reassess their options in the face of higher borrowing costs.

The situation is further complicated by broader economic uncertainties. Zillow had initially forecast a 4.3% increase in existing home sales this year compared to the previous year, anticipating 2026 as a “reset” year for the market. However, Zillow’s chief economist, Mischa Fisher, now acknowledges that the war in Iran has introduced new complexities, particularly regarding energy prices and inflation. “New uncertainty has emerged via energy prices and inflation concerns, adding fresh complexity to our outlook,” Fisher wrote in a report Tuesday.

Economic Modeling Suggests Varying Impacts

Zillow’s modeling suggests the extent of the impact will depend on the duration of the conflict. If the current scenario persists only through the end of April, home sales are still projected to rise by 3.48% this year. However, if the conflict extends to July 1st, that gain would shrink to 2.33%. A continuation through September 1st would further reduce the increase to just 1.21%. If mortgage rates remain 50 basis points higher than previously anticipated, coupled with a 20 basis point increase in unemployment, Zillow forecasts a 0.73% decline in home sales for the year.

New Construction Market Already Feeling the Pinch

The effects aren’t limited to the existing home market. KB Home, a major homebuilder, lowered its full-year forecast after reporting disappointing quarterly earnings. KB Home (NYSE: KBH) Chairman Jeff Mezger stated that the conflict in the Middle East has added “another layer of uncertainty” for consumers. “Against this backdrop, and taking into consideration that our net orders in the first quarter were below the level we needed to hold our prior full-year delivery guidance, we are lowering our range for the year,” Mezger said on a call with analysts.

Builders are currently facing a high supply of homes for sale, and inventory on the existing home side is also increasing, particularly in the South and West. This shift in the market dynamics is giving buyers more leverage, reversing a trend that favored sellers for much of the past few years.

Contract Cancellations Rise

Even before the war began, buyers were increasingly backing out of deals. According to Redfin, contract cancellations reached their highest level since 2017 in February, with roughly one in seven homes (13.7%) that went under contract being canceled. This is up from 12.8% a year earlier. Redfin data indicates a significant imbalance between supply and demand, with over 600,000 more homes listed for sale than We find buyers – a near-record gap, although this varies considerably by location.

A Precarious Position for the Spring Market

The spring housing market, traditionally the busiest season for real estate, is now in a “precarious position,” according to Jake Krimmel, senior economist at Realtor.com. The market is caught between long-term improvements and sudden short-term instability. The increase in mortgage rates is directly linked to concerns about rising inflation, as investors anticipate the Federal Reserve may delay interest rate cuts or even raise rates further to combat inflationary pressures. This is because the 30-year mortgage rate closely tracks the interest rates on 10-year Treasury notes, which are heavily influenced by inflation expectations.

As Marketplace.org reported, mortgage rates dipped below 6% for the first time in three and a half years just two days before the war began, but quickly climbed above 6.5% in the following week.

Looking Ahead: Uncertainty and Potential for Further Volatility

The trajectory of the housing market will largely depend on the duration and intensity of the conflict in Iran. A prolonged conflict could lead to further increases in energy prices, exacerbating inflation and pushing mortgage rates even higher. This would likely result in a more significant slowdown in home sales and potentially a decline in home prices. Conversely, a swift resolution to the conflict could ease inflationary pressures and allow mortgage rates to stabilize or even decline, providing some relief to the housing market. However, even in a best-case scenario, the recent volatility has injected a new level of uncertainty into the market, making it challenging for both buyers and sellers to predict the future.

The coming months will be critical in determining the long-term impact of the Iran conflict on the U.S. Housing market. Monitoring mortgage rate trends, inflation data, and geopolitical developments will be essential for understanding the evolving dynamics of this complex situation.