Welp, I’ve been saying the conflict in the Middle East might have another twist to the story.
And here we are, with a fragile cease-fire agreement that has been successfully violated and potential tensions.
Meanwhile, oil prices are rising again and loan rates are also rising.
What seemed impossible a week ago is now possible again.
A 30-year mortgage rate starting at 7 may be back on the table.
Can Mortgage Rates Rise Back Above 7% Again?
Mortgage rates have appeared to be in a positive place over the past few days.
They had already stopped their escalation because of the peace agreement in the Middle East and the reopening of the Strait of Hormuz.
Then they avoided a possible pullback after a big week of jobs data and were slowly retreating back to their pre-war levels.
Still high, sure, but the trend seemed to be becoming their friend again.
Back at 6.50%, they look set to drop to 6% as the year progresses.
And it appears that the threat of seeing rates rise back to 7% and above is gone.
But that was a few days ago…
Today, it’s a different story with news of rising tensions in the Middle East and President Trump saying the ceasefire has effectively “ended”.
Not only that, but the United States launched an attack last night and will launch more strikes on Iran tonight.
Trump reportedly said, “We’re going to hit them hard again tonight.”
More Bad News for Home Estimates
That’s not good news for oil prices, inflation, the bond market, or housing prices.
What we seemed to be fixing a few weeks ago is now back to square one, or worse.
Of course, Trump also took time to say that he didn’t think the war would “start again.”
Whether true or not, it means that a recent return to pre-war oil prices is in doubt.
And the recent decline in bond yields is also being reversed, with the 10-year yield now up nearly 20 basis points since the end of June and Brent futures up nearly 5% today.
Long story short, we’re back again and any chance of seeing continued improvement and returns in the low 6% or even sub-6% 30-year fixed rate seems to be gone again.
There was hope that we could recover a bit this year and maybe get back to those levels now that the war is behind us.
But now it looks like it’s back and the prospects for a real negotiation seem dim for now.
And just like that, the odds of a 25-bp rate hike at the September meeting returned to being a dds-on favorite.
As of today, the probability of a hike is 51.3%, per CME FedWatch, up from 49.1% yesterday and 36.3% last month.
Fed Rate Hike 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 is any expectation that the Fed will once again go into hike mode, it may raise the 30-year fixed rate (before the actual hike).
So if you’re hoping that mortgage rates will start to drop along with oil (and gas) prices, you may have to be even more patient.
The longer this continues, the greater our national debt as it costs something like two billion dollars a day to fund military operations.
We already have a huge debt problem so this just makes it worse. More government debt must be issued to finance the war, and a higher Treasury supply means investors will demand higher yields.
The result is higher interest rates on everything including home loans. It’s not good news for prospective homebuyers who are already struggling to afford it.
Our best case scenario here is hoping that Iran and the US somehow get peace talks back on track.
But it seems clear that this saga with Iran is far from over, and it may get worse before it gets better.
