And just like that, mortgage rates are back above 6.50% and could be heading even higher.
I’ve been warning folks for a couple weeks now that the worst may not have been behind us.
Between seasonal factors and the ongoing conflict in the Middle East, upward pressure on rates was to be expected.
But they seemed to defy expectations for weeks, nearing the low-6s for a 30-year fixed despite all the goings-on.
Now it seems they’re back to re-testing recent highs and could climb even further this month and next.
Mortgage Rates Rise as Tensions Renew in the Middle East
We knew the conflict in the Middle East wasn’t over, despite a ceasefire and subsequent extension.
While things have been mostly quiet lately, the Strait of Hormuz has remained effectively shut since day one.
And now there are new reports of drones fired at the UAE, a U.S. warship hit, several Iranian boats sunk, and more.
Simply put, there’s renewed fears that things could be ratcheting up again.
That has kept a lot of pressure on oil prices, which remain above $100 per barrel, along with pushing 10-year bond yields up about seven basis points on the day.
First Rising Gas Prices, Then the Price of Everything Else
The conflict has already led to a surge in gas prices, hurting consumers directly. And it’s likely to affect just about everything else soon as well.
Remember, oil and gas touch pretty much everything, whether it’s the production of goods, or the transportation of said goods after they’ve been produced.
In the end, we consumers pay the price in the form of a markup to compensate for the producers and transit companies who face higher input costs.
That tends to lead to inflation, at least initially, even if it can turn into a recession further down the road.
The temporary reaction for mortgage rates will likely also be higher, as increased inflation means fewer or no rate cuts in the near future.
There’s even talk about rate hikes, though I think we just stand pat and maintain a wait-and-see approach.
Bonds and mortgage rates tend to take cues from Fed rate expectations, meaning they stay higher until we know more.
It’s all pretty straightforward. If oil leads to a second wave of inflation, mortgage rates will stay elevated or even move higher again.
Expect Higher Mortgage Rates for the Next Few Months
The takeaway for me is to expect higher mortgage rates for the next several months.
Because even if things get sorted out in the Middle East, which seems unlikely, the damage of $100+ per barrel oil (and all the related backlogs) will take time to work its way through the market.
That means prices will stay high and/or elevated for months and inflation readings could well tick up again in coming months.
Bond traders, MBS investors, and mortgage lenders will all likely invest and price conservatively knowing all this.
Nobody will want to get caught out offering a low interest rate only to see inflation ramp up again.
Adding to this narrative is the fact that mortgage rates tend to be highest in spring and summer.
So it would kind of line up perfectly timing-wise for mortgage rates to rise again in May and June.
However, they could also settle down again in fall, as they tend to, especially with the election midterms on deck.
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