The mortgage market hopes for rate cuts amid war moves

Global tensions between the United States and Iran have led many in the mortgage industry to wonder whether the bombing of Iran nuclear sites would move bond yields and lead to a drop in mortgage rates. On Monday, just as economists were factoring in the possibility of war with Iran, at least one member of the Federal Reserve signaled the chance of a July rate cut.

Both events could have a domino effect on the mortgage market. Shawn Way, West Capital Lending‘s vice president, says he could see the two unrelated events having a crossover impact.

“They both obviously impact the housing market, right? But I’m not sure if they’ll necessarily play off of each other. I mean, as far as the [potential] Fed rate cut, I don’t think that has much to do with us bombing Iran. I mean, I could be wrong, but the two of them together could cause rates to drop even further, potentially,” Way said.

He continued, “Historically speaking, geopolitical issues like war typically cause two things in general. One is that they typically cause oil prices to go up…but the other thing it does is it causes a lot of uncertainty in the market and pushes investors into safer assets, like U.S. Treasuries. And when investors start putting money into U.S. Treasuries, it causes the bond prices to go up, which therefore inversely impacts mortgage rates.”

Way explained that bond action typically causes mortgage rates to drop, but there have been past anomalies. “If you look back at when Russia invaded Ukraine a couple of years ago, that didn’t happen. And if you look at this morning, bond prices are up a little bit, but not much. After a huge story like the U.S. bombing Iran, you would think the 10-year would have skyrocketed today, but it didn’t.”

Way says that since the COVID-19 pandemic, it’s been hard to predict how global events will impact rates and buyers’ behavior. “The normal historical trackers that you would look at haven’t been impacting [the markets] in the way you would think that would, so it’s kind of there’s a lot of uncertainty in the market, and it’s making it very difficult to predict what’s going to happen next.”

The Fed rate cut is the most important news

Melissa Cohn, regional vice president of William Raveis Mortgage, says that the markets have “not paid much attention” to the bombings. “Oil prices are down, which is good, because that’s deflationary. Bond yields are down, not due to what was going on in the Middle East, but more as [the] Fed has floated the idea of a potential July rate cut.”

Both Cohn and Way shared that the markets react to the “most important” news of the day. “Today,” Cohn said, “It seems to be the Fed is a much bigger deal than what’s going on in Iran…mortgages and housing are all very sensitive to inflation. You’re always afraid, if there is a war in the Middle East, with oil production, being able to deliver oil, and that oil prices could go up as a result of the inability to get oil. As a result, you would think that if oil prices were skyrocketing, then bond yields would probably be going up too, because higher oil prices are inflationary. A large part of our economy is petroleum-driven still.”

HousingWire Lead Analyst Logan Mohtashami agreed that the bigger story today was when Fed Vice Chair said she would support a July rate cut. “So, stocks were up in the morning, oil prices didn’t spill over higher, the dollar had a small move. It’s almost like nothing happened over the weekend — the market is very calm with bond yields and mortgage rates.”

He added that “traders don’t believe in the spill-over impact. Oil prices also made a giant move already, hard for it to go higher unless supply is really hit.”

Lower rates on the way?

While some industry experts like Edge Home Finance‘s Carlos Scarpero say it’s “too early” to predict lower mortgage rates, Cohn is still optimistic that rates will see a downshift. “I think that borrowers are just sort of very focused on their purchases, and nothing that has happened in the world, if it has an impact on them already, it just seems like it’s business as usual.”

“So far, the market has had a relatively muted reaction to the U.S. bombing of Iran,” said Danielle Hale, chief economist for Realtor.com. “It seems investors are still in wait-and-see mode — waiting to see whether there is an escalation of tensions. If there were further escalation, it could potentially drive oil prices higher, which could undermine recently improving inflation trends and make it trickier for the Fed to sort out the impact of tariff-related price increases versus oil-price related increases.”

She continued, “This could make it more challenging for the Fed to calibrate policy at a time of transition in which it already faces goals that could be increasingly in tension.”

Focusing on rate movement

Way urges buyers to keep an eye on potential rate cuts as they consider homeownership, regardless of ongoing geopolitical headlines. “Rates dropping is going to help me and other mortgage professionals, because we’re going to get a lot more mortgage applications, and see a lot more buyers in the market. Now…the downside to rates dropping is that a lot more buyers [will] flood the market, which causes demand issues and supply issues. So typically, home values go up.”

He continued, “So for those that have been sitting down trying to buy a house for a long time, my advice then would be either buy now and then refinance when rates drop, because once you get the house, you can always fix the rate in the future.”

Geno Paluso, CEO of Sagent, says that he’s gearing up for rate movement. “Speculation about July Fed cuts has increased as world events grab headlines, and if potential July Fed cuts lead to lower mortgage rates, the mortgage servicers who are most proactive with customer engagement will achieve the highest retention rates,” he said.