Though the housing market is never immune to political and economic volatility, mortgage rates have been eerily calm. Over the last month, the average rate for a 30-year fixed mortgage has moved in a narrow range between 6.8% and 7%.
An escalating war in the Middle East could spark fresh volatility across global markets, significantly affecting oil prices and the US dollar. That would have a ripple effect on long-term Treasury yields and mortgage rates.
Mortgage rates had been expected to gradually improve in 2025, but the Trump administration's inflationary tariffs, deficit spending and geopolitical maneuvering led to bleaker forecasts. Most economists now say average mortgage rates will stay above 6.5% for the better part of the year, keeping many prospective homeowners away.
"You'd need to see mortgage rates pretty far below current levels, certainly below 6.75%, to incentivize homebuyers," said Beth Ann Bovino, chief economist at U.S. Bank.
Fed rate cuts still on the agenda
Despite widespread pleas for lower consumer borrowing costs, including from the White House, the Federal Reserve held interest rates steady again at its monetary policy meeting on June 18.
The prolonged pause in rate cuts gives the central bank some time to assess numerous wild cards: the labor market, price growth and an evolving conflict with Iran.
The Fed is tasked with maintaining maximum employment and containing inflation, primarily through setting its short-term benchmark interest rate for lenders. A sluggish economy typically warrants interest rate cuts to stimulate growth, but lowering rates too quickly could fuel price growth when inflation is still above target.
The central bank could cut rates as early as this fall, especially if rising jobless claims and slowing economic growth force its hand. At the same time, other factors, including the current conflict in the Middle East, could quash hopes of rate cuts, pushing them off until next year.
Monetary policy changes by the Fed influence overall borrowing rates, though it's not a one-to-one relationship with home loans. In 2024, the central bank cut interest rates three times, but mortgage rates didn't fall.
Mortgage rates are primarily driven by movement in the bond market, specifically the 10-year Treasury yield. Bond yields and interest rates rise or fall depending on how inflation and labor data shift investor speculation and risk assessment.
The impact of tariffs and war on mortgage rates
A significant concern is how a global trade war and a prolonged military war in the Middle East could affect interest rates and the housing market. Mortgage rates are highly sensitive to fiscal policy and supply chain shocks.
If inflation increases due to tariff policies or a surge in energy costs, mortgage rates could increase.
"Even though many of the tariffs are in place, some of the big ones have yet to take effect," said Bovino. The average household in the US is expected to lose about $3,000 in income from tariffs, with lower-income households getting hit even harder, according to Bovino.
On the flip side, the Israel-Iran-US conflict could spark fear of a downturn and propel investors to buy safer investments like US Treasury bonds. During periods of heightened geopolitical turmoil, increased demand for bonds can drive prices up and yields down, temporarily pushing mortgage rates lower.
Neither scenario would be positive news. When households are nervous about their finances, they'll be more reluctant to make huge purchases and take on new debt.
Adjusting to an unaffordable housing market
Major affordability challenges resulted in another inactive spring homebuying season. Even as the long-standing housing shortage eases in several local markets and gives some buyers improved negotiating power, the rest remain locked out by steep home prices.
"Prices are still incredibly high," Bovino said. "Add to that the borrowing costs of a mortgage, and it's prohibitively expensive for most people to get into the housing market."
Prospective buyers waiting for mortgage rates to drop may soon have to adjust to the "higher for longer" rate environment, with mortgage loan rates fluctuating between 5% and 7% over the longer term.
While market forces are out of your control, there are ways to make buying a home slightly more affordable. Last year, nearly half of all homebuyers secured a mortgage rate below 5%, according to Zillow.
Here are some proven strategies that can help you save up to 1.5% on your mortgage rate.
💰 Build your credit score. Your credit score will help determine whether you qualify for a mortgage and at what interest rate. A credit score of 740 or higher will help you qualify for a lower rate.
💰 Save for a bigger down payment. A larger down payment allows you to take out a smaller mortgage and get a lower interest rate from your lender. If you can afford it, a down payment of at least 20% will also eliminate private mortgage insurance.
💰 Shop for mortgage lenders. Comparing loan offers from multiple mortgage lenders can help you negotiate a better rate. Experts recommend getting at least two to three loan estimates from different lenders.
💰 Consider mortgage points. You can get a lower mortgage rate by buying mortgage points, with each point costing 1% of the total loan amount. One mortgage point equals a 0.25% decrease in your mortgage rate.
