Well, it’s a new year and it certainly didn’t begin quietly. Might as well address the elephant in the room when it comes to your mortgage.
This isn’t the first time I’ve discussed the possibility of war and its impact on mortgage rates, with the last discussion centered on the Syrian conflict back in 2013.
At that time, the 30-year fixed mortgage was roughly 4.50% on average. As the drama unfolded, rates fell about 30 basis points in a matter of months before climbing back to where they started.
That’s the most recent example, though it might not be the best indicator of things to come because the adversaries are different, as is the scenario.
How an Iranian Conflict Would Affect Mortgage Rates
First off, we aren’t at war with Iran, at least not formally. Some argue that we’ve been at war with Iran for decades, via a cold war involving its proxies.
Secondly, that may not change as a result of the strike that took out their leading general, Qasem Soleimani.
While the rhetoric has certainly ratcheted up in recent days, nothing has materialized yet other than more threats.
There is a good chance Iran will take retaliatory action, but what action it takes will likely be the driving force behind any changes to mortgage rates.
Simply put, fear leads to lower interest rates as investors flee the stock market, which is traditionally riskier, to the bond market, which is known as a safe haven in times of turmoil.
When that happens, bond prices rise and their yields drop, and with them mortgage rates. At least, that’s the long-held theory.
It tends to work out that way, though it doesn’t all happen in a vacuum. It depends what else is going with the economy too.
Still, geopolitical events can take center stage and make a big impact in a short amount of time. The question is whether they have enough staying power to dent longer-term trends.
As I noted in my 2020 mortgage rate predictions post, opportunities were likely to present themselves, thanks to the ongoing Trump impeachment, trade war with China, and Brexit.
There Was Already Downward Pressure on Mortgage Rates Before Iran
Now we’ve been thrown another serious curveball in the way of a potential war with what many view as a much fiercer foe than Syria or Iraq.
As a result, mortgage rates have already dropped about an eighth of a point, with most pundits expecting even lower rates as this all unfolds.
Again, nothing has happened yet, in terms of retaliation, so we’re in a bit of a holding pattern, but rates were under pressure to stay or move lower before this materialized.
We already had a long list of catalysts with the potential to move rates lower, and now we’ve got an even bigger one.
Mortgage rates are pretty darn low as it stands, averaging around 3.75% for the 30-year fixed.
The all-time low is 3.31%, achieved back in late 2012 per Freddie Mac data. If this Iran situation gets particularly ugly, we could certainly revisit or even surpass those lows.
But it really depends what transpires. When we invaded Iraq in early 2003, mortgage rates bounced all over the place.
They were as low as 5.23% and as high as 6.26% in just a matter of months.
I wouldn’t be surprised if we see similar volatility in 2020, which again, will present opportunities to those in a position to pick and choose their mortgage closing date.
Longer term, a real (hot) war could actually lead to inflation and higher interest rates, though that outcome is hopefully a lot less likely.
In summary, the fear of what is to come will probably drive mortgage rates lower in the short term. But once reality sets in, rates may return to prior levels.
Iran aside, there’s still plenty of other stuff that has the ability to make a big splash in 2020, so be sure to keep a close eye on the news if you’re in the market to get a new mortgage.