As we enter another week of the Iran conflict, the question now is what will this do to the economy, but for this article, we want to focus specifically on what this conflict means for the U.S. housing market. There are currently two sides to this discussion.
One camp believes the economy is still expanding and the 10-year yield should rise as inflation rises, while a second group believes the U.S. consumer can’t take another hit, given a softer labor market. Both take can impact mortgage rates, but for now rates have been very stable, and the 10- year yield is still low compared to the higher levels since 2022.
Two views on what happens next with the 10-year yield and mortgage rates
The case for lower rates
1. The economy can’t take the inflation hit from rising oil prices, rising airline prices and rising diesel prices, which will impact food costs — plus we have 15% tariffs coming on soon. This shock can’t be absorbed by consumers and a weak labor market will force the Fed to cut interest rates, as more companies will need to lay off people due to lower demand.
The case for higher rates
2. The economy currently spends less on energy costs than in previous decades, so it can handle higher energy costs, much like it did in the early part of the last decade. With rising oil and food prices, inflation expectations will also rise, forcing the Fed to be more hawkish and potentially hike rates. Even if the Fed just talks about a rate hike it can send rates higher. Household balance sheets remain strong, and for now, rates and inflation should rise together.
Both viewpoints have some valid claims, but now that the conflict has escalated and we have had an energy spike with oil prices getting as high as 118 on Sunday, let’s see what the data and history tell us. Because as I am writing this article, the 10-year yield is at 4.13% and I am still waiting to see if the 10-year yield can simply close above 4.15% and get follow-though bond selling.
The current state of the housing market
Currently, the housing market looks fine as long as mortgage rates are near 6%. Sales are growing and the growth rate of inventory is cooling off — we might even have some negative year-over-year weekly prints.
Our weekend Housing Market Tracker goes into all the data lines you need in order to understand what’s happening here. The housing market has been affected when rates rose above the 6.64% level over the last few years. So what are the possibilities of higher rates due to higher oil prices?
History of mortgage rates and oil prices
Here is a chart of mortgage rates going back decades.
We had oil shock events in the early and late 1970s, which drove up rates, but remember, the economy was booming back then, with huge labor force growth and a housing market that was on fire. So, don’t expect 1970s inflation and mortgage rates with this current conflict.
More relevantly, we had the Gulf War oil spike in 1991 and a recession at the time. We also saw a spike in oil prices in August of 2008, but the economy was experiencing a banking crisis. Oil prices were elevated in the early part of the 2010s and inflation and rates were tame then. Then we had the oil spike after the Russian invasion of Ukraine. Take those events with the oil charts versus mortgage rates.
What do we see? Well, for me, it’s that Fed policy really runs the show with each episode, whether mortgage rates were under 5% in the early part of the 2010 decade or heading toward 18% in the early 1980s.
Conclusion
For now, we have to deal with today’s economy and Federal Reserve policy, which is much different than previous decades. The Fed has done many rate cuts already this cycle and mortgage spreads are almost back to normal, which has kept mortgage rates under 6.25% for the entire year — despite all the drama. Even today, Mortgage News Daily reported mortgage rates at 6.17%. Hug a mortgage spread for their role in keeping rates low.
On Sunday night we saw that oil prices getting toward $120 sent the 10-year yield up toward 4.21%, but as oil prices fell, so did the 10-year yield, and it’s currently at 4.13%. So we are going to keep an eye on this relationship in the upcoming weeks. As long as this conflict continues, the impact on the economy and inflation numbers will be persistent.
At some point, the bond market will be telling us the economy is getting hit hard, but as of right now, it’s not doing that, nor does it believe this conflict will last very long.
English