The conflict with Iran continues to be a threat to mortgage rates, and even today, 100 days into this conflict, Iran shot missiles at Israel and President Trump is trying to stop Israel from firing back, pushing oil prices up 3% late Sunday. This made me think: what if everyone is wrong on the timeline, and there is no end to this conflict until after the midterms?
If Iran wants to inflict as much political pain on President Trump and the Republicans as possible, it could try to keep the conflict going for the next six months until after the elections in November. What would that mean for mortgage rates?Â
First, things have already gotten a bit more complicated for mortgage rates this year as the labor data has improved. However, the 10-year yield and mortgage spreads have behaved well, and for the most part, we have remained within my 2026 forecast range.
In the 2026 HousingWire forecast, I anticipated the following ranges:
- Mortgage rates between 5.75% and 6.75%
- The 10-year yield fluctuating between 3.80% and 4.60%
Now, my higher rates and bond market forecasts in 2026 were based on a premise that if the labor data improved and inflation stayed firm, it would be reasonable for the 10-year to stay in the upper range between 4.30%-4.60% and mortgage rates to be between 6.375%-6.75%.
However, clearly, the Iranian conflict has changed the ball game altogether, because I didn't have the labor data improving, a conflict in the Middle East pushing energy prices up or the U.S. dollar heading higher. So, what if this conflict lasts until after the midterms?
10-year yield and the Iran conflict
The Iran conflict has been going on longer than people expected. I made the case in this article on May 20 that rates could go at most 0.375%-0.4375% above my peak of 6.75% if the conflict continued a bit longer. This assumed back then that the labor data would stay better, inflation would be firmer and the Fed couldn't ignore either. However, that article was still based on a premise that the conflict would end in a reasonable period, not last past the midterms.
So far, 100 days into the conflict, the 10-year yield and rates haven't acted like this conflict would last that long, as they have stayed in my forecast range most of the year.
However, the labor data has improved enough this year to show that the labor market wasn't breaking in 2025 but hit a soft patch during a crazy year when we had Godzilla tariffs, government shutdowns, firing of government workers and canceled funding for certain programs.
I wrote about the jobs report and what has changed recently in this article. The labor data firming up along with rising inflation makes that upper level range of 4.30%-4.60% for the 10-year yield seem very reasonable. However, now we have a new variable, the Fed is getting hawkish when people thought they would still stay dovish long enough to get the last two to three rate cuts in.
The Federal Reserve now
I'm going to keep it simple here. We went from expecting two to three rate cuts in 2026 to one hike already priced into markets, but now we have to factor in another rate-hike cycle, where three to four more rate hikes can be in play.
The only reason the bond market fell below 4% this year is the same reason it did in 2025, 2024 and 2023: bond investors were afraid of economic growth and labor-market risks. I was a bit shocked that the 10-year yield fell below 4% this year as inflation picked up, but we did have that one negative jobs report, which was the anomaly among the past five reports. Lets remember the 10-year yield got as high as 4.31% before the conflict started. Now the labor data has a bit more breadth.
If the conflict lasts past the midterms and if the economic data stays firm, then look for a lot of Fed members to talk about more than one rate hike; they will be guiding the market to multiple rate hikes.
The risk with higher energy costs and high short- and long-term rates is that they can further slow growth going into 2027. If the Fed sees any evidence of growth and a weakening in the labor market, look for their verbiage to change. But for now and over the next five to six months, look for more of a hawkish Fed — and that will only get worse if the conflict doesn't end soon.
What happens next
If the conflict continues for another five to six months, there are so many scenarios that could happen. If the economy outperforms and inflation worsens, higher mortgage rates, peaking at 0.435% above 6.75%, might not be high enough. However, if the economy and the stock market do worse over the next five to six months, then that peak level should hold because spreads are better. The reality is that mortgage spreads have been the only reason why mortgage rates are not above 7%.
Let's compare last week's mortgage rates to where they would have been over the last three years, given the 10-year yield's current level:
- If we had the worst mortgage spread levels of 2023, mortgage rates would be 7.76% today, not 6.66%.
- If we had the worst levels of 2024, mortgage rates would be 7.38% todayÂ
- If we had the worst levels of 2025, mortgage rates would be 7.19% today.
Conclusion
The Iran conflict lasting another five to six months isn't my base case because that is a lot of pain for Iran and the world, which might get NATO, China and others to be more aggressive in finding a solution. So, for now, I am sticking with the original premise that if the conflict lasts longer but not past July 4, the labor data improvement could add 0.375%-0.435% to the peak forecast of 6.75% I had for 2026.
At the end of May, when it looked like we had some resolution, I wrote here about what could happen to mortgage rates with a quicker end to the conflict.
However, with Sunday's news, it doesn't look like we are close to a deal again as the weekend war storyline continues to make headlines. The question now for mortgage rates is whether this actually goes to the midterms or beyond.
