The U.S. housing market, which had just begun to show signs of recovery heading into spring 2026, is now being pulled back by the widening economic fallout from the U.S.-Israel war against Iran, and experts say higher mortgage rates are just one of several forces pushing buyers to the sidelines.
Mortgage Rates Spike After Conflict Begins
Just days before U.S. and Israeli forces launched strikes against Iran on February 28, the average 30-year fixed mortgage rate had fallen to 5.99%, according to Mortgage News Daily. That figure has since climbed to approximately 6.43%, per the Mortgage Bankers Association (MBA), reaching its highest point in five months.
The reason is straightforward: Iran's effective blockade of the Strait of Hormuz, a shipping route that carries roughly 20% of the world's oil supply, sent Brent crude surging past $119 per barrel, stoking inflation fears.
When investors expect higher inflation, they demand higher returns on long-term bonds, which pushes Treasury yields up and, in turn, drives mortgage rates higher, according to CNBC.
"The ongoing risk of prolonged high oil prices has kept Treasury yields elevated, resulting in higher mortgage rates," said Joel Kan, deputy chief economist at the MBA.
Buyers Are Pulling Back
The higher borrowing costs are already being felt. Mortgage applications for home purchases dropped 5% in one week, while overall mortgage applications, including refinancing, fell 10.5% on a seasonally adjusted basis, according to the MBA.
Contract cancellations hit 14.7% of homes that went under agreement in February, up from 12.8% the year before, per Redfin data. Zillow, which had projected a 4.3% increase in existing home sales this year, has already revised its outlook downward.
Chief economist Skylar Olsen noted that new uncertainties around energy prices and inflation have added "additional complexity" to those projections, Axios reported.
Builders Feeling the Pressure
The fallout is also hitting homebuilders directly. KB Home, one of the country's largest home construction companies, cut its full-year delivery guidance by 1,000 units and lowered its housing revenue forecast by approximately $450 million following a weaker-than-expected first quarter.
CEO Robert McGibney told analysts the company had "solid momentum through January and February," but that activity had softened since the war began.
The National Association of Home Builders (NAHB) reported builder confidence at just 38 in March. Robert Dietz, the group's chief economist, cited rising fuel costs, which account for about 3% of the expense of building a single-family home, as an added burden on already strained margins.
The Fed Is Stuck
The Federal Reserve held its benchmark interest rate steady at 3.50%–3.75% at its March meeting, the second consecutive hold. Officials raised their core inflation forecast for 2026 to 2.7% and signaled only one possible rate cut this year, as per Reuters.
Fed Chair Jerome Powell acknowledged the situation is deeply uncertain: "Nobody knows," he said, referring to how the conflict's economic impact will ultimately unfold. Markets now put a 74% probability on rates remaining unchanged through December 2026, according to the CME FedWatch tool, a stark reversal from January, when investors had priced in two to three cuts.
What It Means for Buyers
Lawrence Yun, chief economist at the National Association of Realtors, said conditions are still "significantly more favorable for buyers this spring compared to the previous year," pointing to slower home price growth and more available inventory.
But if the war continues through the summer, Zillow's models suggest that year-over-year home sales could contract outright by year's end. For now, the recovery that many buyers were counting on has stalled, not just because of rates, but because of the broad uncertainty rippling out from the Middle East.
Originally published on Realty Today
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