Key Takeaways:
The Iran war has reversed a hard-won improvement in US housing affordability, pushing mortgage rates to a nine-month high and freezing what had been a gradual spring thaw in the market.
The Iran war has pushed US mortgage rates to 6.51%, the highest in nine months, halting a gradual improvement in housing affordability that had been building since late 2023. The average rate on a 30-year home loan climbed to that level, according to Freddie Mac, as the 10-year Treasury yield rose to 4.49% on concerns that the energy crisis will stoke inflation.
"The improvement we have been seeing effectively gets halted here," said Jim Egan, US housing strategist at Morgan Stanley. At the start of January, he had expected mortgage rates to fall to 5.75% later this year.
Buyers now allocate 42% of their incomes to housing costs, according to the Burns Affordability Index, which is calculated based on a 10% down payment on a median-priced existing home. That is still extremely unaffordable but better than the 48% peak in late 2023. The main inputs that had been driving improvement — falling mortgage rates, slowing home-price appreciation and rising incomes — have all shifted direction since the war began Feb. 28.
The reversal threatens to lock the housing market into a fourth consecutive year of stagnation. Morgan Stanley's revised outlook no longer expects mortgage rates to dip below 6% before the end of 2027, pushing any meaningful recovery further into the future. Around half of outstanding home loans still carry an interest rate below 4%, according to the bank, meaning owners remain reluctant to sell and give up their ultracheap financing.
Affordability Gains Erased
Housing had been experiencing a "glacial" improvement in affordability, said Rick Palacios, director of research at John Burns Research & Consulting. Measured by housing-costs-to-income ratios, unaffordability peaked 2½ years ago and had been slowly grinding lower. National home-price appreciation slowed, with prices rising below the overall rate of inflation for nine consecutive months. The supply of single-family homes on the market returned to prepandemic levels, according to the National Association of Realtors.
All of that was helping until rates started moving the wrong way. Mortgage rates briefly dipped below 6% on the eve of the war — the first time since 2022 that rates had started with a five. The S&P CoreLogic Case-Shiller US National Home Price Index, released Tuesday, is expected to show home values continuing to move sideways.
War's Toll on Housing Demand
The war has also disrupted the global energy supply, driving up gas prices and overall inflation. Brent crude climbed 3.3% to $99.4 a barrel Tuesday after the US carried out what it called "self-defense strikes" targeting Iranian missile launch sites and boats around the Strait of Hormuz. The strikes came hours after Iranian negotiators met with Qatari mediators in Doha, with US Secretary of State Marco Rubio saying talks were being held up by "disagreements over a word, a sentence."
Higher oil prices feed directly into mortgage rates through the bond market. The 10-year Treasury yield, which mortgage rates track, rises when investors price in higher inflation expectations. The war has already cost the United States at least $29 billion, according to the White House, and roiled economies globally. Germany's DIHK lowered its 2026 growth forecast to 0.3% from 1% at the beginning of the year, citing the economic consequences of the war.
Heading into the crucial spring selling season, realtors and home builders had been hopeful that lower mortgage rates would finally get buyers off the sidelines. Instead, 2026 is shaping up to be the fourth year in a row where the US housing market is effectively frozen. When the thaw happens will depend on the war's outcome, the price of oil and ultimately the bond market.
This article is for informational purposes only and does not constitute investment advice.
