Oil tankers are moving through the Strait of Hormuz again. The Iran-Israel conflict, which rattled global markets for months, appears to be heading toward a resolution. For US mortgage markets, this removes a key risk variable: the specter of persistently higher oil prices. But the story doesn't end there. Crude oil prices have already fallen 12% from conflict highs, easing inflationary pressures, but the Fed remains firmly in restrictive mode. The labor market, with unemployment at 3.8% and monthly job creation above 200,000, shows no signs of cooling. This keeps the Federal Reserve cautious, even with peace on the horizon. The 10-year Treasury yield, which had spiked to 4.60% during the conflict, has since retreated to 4.35%, but remains elevated relative to pre-conflict levels of 4.10%. Mortgage rates, at 6.65%, are only 15 basis points below their conflict peak, suggesting that the geopolitical risk premium has not fully dissipated.

The Big Picture

Since mid-June 2025, the housing market had been signaling a shift: rates were falling and demand was picking up. Then the conflict erupted, bringing volatility. Yet something unexpected happened: mortgage spreads—the difference between the 10-year Treasury yield and mortgage rates—stayed remarkably low. This kept mortgage rates below 6.64% even as the 10-year yield fluctuated. Investors in mortgage-backed securities (MBS) did not demand a significant additional premium, suggesting that the market had largely priced in the geopolitical risk. But this behavior could reverse if core inflation does not ease. The core PCE index, excluding food and energy, remains at 2.8%, well above the Fed's 2% target. Meanwhile, long-term inflation expectations, as measured by 5-year inflation swaps, have risen 15 basis points since the conflict began, now at 2.4%. This indicates that markets are not fully convinced that peace will bring rapid disinflation. Additionally, the Fed's balance sheet runoff, which has reduced its holdings by $1.2 trillion since 2022, continues to drain liquidity from the banking system, potentially constraining mortgage lending capacity.

If the conflict truly ends, spreads should remain compressed. But oil isn't the whole story. Core inflation remains above the Fed's target, and several central bank officials have turned hawkish. Even Christopher Waller, one of the biggest doves, now urges caution. This complicates the outlook for mortgage rates. Moreover, regional banks, which are key in mortgage origination, face higher funding costs due to competition for deposits. This could limit lenders' ability to offer competitive rates, even if spreads remain low. On the demand side, housing demand remains solid, driven by millennial demographics and a severe supply shortage. Housing inventory stands at 1.2 million units, well below the historical average of 2.0 million. This puts upward pressure on prices, which in turn could keep housing inflation elevated—a major component of CPI. The National Association of Realtors reports that the median existing-home price rose 4.5% year-over-year in April 2026, outpacing wage growth. This affordability crunch could dampen demand if mortgage rates stay above 6.5%.

“The end of the conflict removes one risk, but the Fed and inflation remain the true drivers of mortgage rates.”

By the Numbers

• Current mortgage spread: If the conflict ends, spreads should stay low, similar to levels seen during most of the conflict, preventing rates from spiking. The current spread is approximately 170 basis points, down from 250 basis points in mid-2023.
• Rates without favorable spreads: At worst 2023 spread levels (300 bps), mortgage rates would be 7.86% today, not 6.65%. At 2024 worst levels (280 bps): 7.48%. At 2025 worst levels (260 bps): 7.29%. This underscores the critical role of spreads in rate determination.
• 2026 forecast range: Mortgage rates between 5.75% and 6.75%; 10-year yield between 3.80% and 4.60%. The conflict didn't break this channel, but inflation could. If core PCE exceeds 3%, the 10-year could surge above 4.60%, pushing mortgage rates to 7% or higher.
• Fed expectations shift: Market pricing went from 2-3 rate cuts in 2026 to a rate hike being priced in. The conflict's end could reverse this if inflation improves. Currently, the market assigns a 30% probability to a rate hike at the September 2026 FOMC meeting, up from 5% three months ago.
• Mortgage demand impact: Purchase mortgage applications fell 8% during the conflict but have rebounded 3% in the last two weeks, according to the MBA. This suggests buyers are responding to reduced uncertainty.

Why It Matters

The end of the conflict is positive for mortgage rates because it removes geopolitical risk premium. However, the real challenge lies in monetary policy. The Fed has hardened its stance because the labor market remains strong and inflation isn't budging. If inflation continues to rise, even with peace in the Middle East, mortgage rates may not return to pre-conflict lows. In fact, the 10-year yield has already risen 20 bps since the ceasefire announcement, indicating that markets are more concerned about inflation than geopolitics. Moreover, the Fed could be forced to hike rates if inflation accelerates, which would be a severe blow to the mortgage market. In that scenario, mortgage rates could exceed 7%, hurting affordability and demand. Homebuyers who have been waiting for a significant rate drop could be disappointed. On the other hand, Treasury bond investors could benefit from higher rates, but at the cost of increased volatility. The lock-in effect, where existing homeowners with sub-4% mortgages are reluctant to sell, continues to constrain supply, keeping home prices elevated. This dynamic could persist even if rates fall modestly.

Winners are homebuyers who can act quickly if rates dip temporarily. Losers would be those waiting for a sharp drop: the 10-year may not revisit 4.24% (the post-conflict low) if inflation doesn't cooperate. Existing homeowners with fixed-rate mortgages at 3% or less (about 60% of mortgaged households) are largely unaffected, but those needing to refinance or purchase a new home face higher costs. The effective mortgage rate on outstanding debt is only 3.8%, creating a strong disincentive to move. This reduces the supply of existing homes, further supporting prices. For investors, the low spread environment makes MBS attractive relative to Treasuries, but convexity risk must be managed. If rates fall, prepayments increase, shortening duration; if rates rise, prepayments slow, extending duration. Active management is essential.

What This Means For You

1. 1Homebuyers: If you're shopping for a mortgage, watch Fed statements. Any sign that inflation is easing could push rates toward the lower end of the range (5.75%). Act swiftly if you see an opportunity. Consider locking your rate if the 10-year yield falls below 4.0%. Also, evaluate adjustable-rate mortgages (ARMs) if you plan to move within 5-7 years, as initial rates are typically lower. FHA and VA loans may offer more favorable terms for eligible buyers. Don't overlook first-time homebuyer assistance programs, which can help with down payments and closing costs.
2. 2Investors: Low spreads are a gift. If they persist, mortgages are attractive. But beware of a hawkish Fed pivot—that would lift the 10-year and, with it, mortgage rates. Diversify between agency MBS and Treasuries. Agency MBS offer a yield pickup of 50-70 bps over Treasuries but carry prepayment risk. If rates fall, prepayments rise, reducing bond duration. Conversely, if rates rise, prepayments slow, extending duration. This convexity risk must be actively managed. Consider using interest rate swaps or options to hedge duration exposure. Also, monitor the Fed's MBS reinvestment policy; any change could affect spreads.
3. 3Agents and brokers: Prepare clients for a market of stable but not low rates. Demand remains firm even at 6.75%, but affordability is still a challenge. Educate buyers on the importance of credit scores and down payments to secure the best rates. Highlight the availability of rate buydowns and temporary rate reductions offered by builders. New construction homes often come with incentives that can lower effective borrowing costs. Also, advise sellers to price realistically, as higher rates reduce purchasing power. The market is sensitive to monthly payment changes; a 0.25% rate change can alter affordability by thousands of dollars over the loan term.

What To Watch Next

Upcoming inflation data (CPI and PCE) will be critical. If core inflation shows a downward trend, the Fed could moderate its rhetoric and mortgage rates could fall toward 5.75%. Also watch Fed minutes and speeches from Waller and Powell. The June 2026 FOMC meeting will be pivotal: if the dot plot shows a median of rate cuts, rates could react lower. Conversely, if more hikes are projected, the mortgage market will suffer. Additionally, oil flow through Hormuz must remain uninterrupted. Any incident could reignite the risk premium and push rates higher. Another factor to monitor is Treasury issuance: the upcoming TBAC announcement could reveal increased long-term debt issuance, which would lift term premiums and, consequently, mortgage rates. Also, keep an eye on the housing starts and building permits data, as they signal future supply. A pickup in construction could alleviate supply constraints and moderate price growth, but labor shortages and high material costs remain headwinds.

The Bottom Line

The end of the Iran-Israel conflict is good news for mortgage rates, but it's not a slam dunk. Spreads will remain the hero, but inflation and the Fed are potential villains. The 5.75%-6.75% rate range remains the most likely scenario for the rest of 2026. Stay alert to inflation data—they will dictate the next move. In an environment of uncertainty, flexibility and speed in decision-making will be key for buyers and investors. Don't be swayed by geopolitical optimism without considering macroeconomic fundamentals. Peace in the Middle East is a relief, but the battle against inflation is not yet won. The path forward depends on whether the Fed can achieve a soft landing without reigniting price pressures. For now, the housing market remains in a delicate balance, with rates hovering near 6.65% and buyers cautiously returning. The next few months will determine whether this balance tips toward recovery or renewed stress.