Welp, I’ve been saying the conflict in the Middle East could have another twist in the tale.
And here we are, with a fragile ceasefire effectively broken and a possible ratcheting up in tensions.
In the meantime, oil prices are back on the rise and mortgage rates are climbing too.
What seemed impossible a week ago may now be possible again.
A 30-year fixed mortgage rate that starts with a 7 could be back on the table.
Could Mortgage Rates Rise Back Above 7% Again?
Mortgage rates appeared to be a pretty good place just a few days ago.
They had already stopped their rise thanks to a peace deal in the Middle East and a reopening of the Strait of Hormuz.
Then they avoided a possible setback after a big jobs data week and were slowly drifting back toward their pre-war levels.
Still elevated, sure, but the trend seemed to be becoming their friend again.
Back toward 6.50%, they seemed destined to fall back toward 6% as the year went on.
And it appeared the threat of seeing rates climb back to 7% and beyond was gone.
But that was a few days ago…
Today, it’s a different story with news of escalating tensions in the Middle East and President Trump saying the ceasefire was effectively “over.”
Not only that, but that the United States launched attacks last night and would launch more strikes on Iran tonight.
Trump reportedly said, “we’re going to hit them hard again tonight.”
More Bad News for Mortgage Rates
That’s not great news for oil prices, inflation, the bond market, or mortgage rates.
Something we seemed to work out over the past few weeks is now back to square one, or even worse.
Of course, Trump also took the time to say he didn’t think the war would “start again.”
Whether true or not, it means the recent return to pre-war prices for oil is in doubt.
And the recent drop in bond yields is also being reversed, with the 10-year yield now up about 20 basis points since the end of June and Brent futures up roughly 5% today.
Long story short, we are moving backwards again and any chance of seeing continued improvement and a return to a low-6% or even a sub-6% 30-year fixed seems to be gone again.
There had been hope that we could slowly recover this year and possibly get back to those levels with the war behind us.
But now it appears that it’s back on and prospects of real negotiation seem to be dimming by the moment.
And just like that, the odds of a 25-bp rate hike at the September meeting are back to being the odds-on favorite.
As of today, the odds of a hike are 51.3%, per CME FedWatch, up from 49.1% yesterday and 36.3% a month ago.
Fed Rate Hikes Becoming Increasingly Likely
Mortgage rates and the federal funds rate are very different rates (one long and one short), but Fed rate expectations can push mortgage rates higher or lower over time.
And if there’s the expectation that the Fed is going to get into hiking mode again, it could push 30-year fixed rates higher (before the actual hike).
So if you’re hoping mortgage rates would begin falling along with oil (and gas) prices, you might have to be even more patient.
The longer this goes on, the higher our national debt as it costs something like $2 billion per day to fund military operations.
We already have a major debt problem so this just exacerbates it. More government debt must be issued to fund the war, and that higher supply of Treasuries means investors will demand a higher yield.
The result is higher interest rates on everything including home loans. Not great news for prospective home buyers already grappling with a lack of affordability.
Our best-case scenario here is hoping Iran and the U.S. somehow get peace talks back on track.
But it seems clear that this saga with Iran is far from over, and could even get worse before it gets better.
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