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Oil prices are rising due to the war in Iran, and this increase may soon be felt by home buyers.
Higher energy costs associated with the conflict are fueling inflation, making it more unlikely that the Federal Reserve will cut interest rates, keeping mortgage rates high. This means that buying a home could become even more expensive in the coming months.
Here’s how the conflict could impact the U.S. housing market — and what it could mean for potential buyers.
Why Iran Conflict Could Keep Mortgage Rates High?
Rising oil prices are a major inflationary force, and inflation plays a direct role in moving mortgage rates.
“When inflation goes down, mortgage rates go up,” said melissa cohnRegional Vice President of William Ravis Mortgage. “Until the war is resolved and oil prices settle back down, mortgage rates will remain high. And as more and more countries get involved in this war, it will take a lot longer for things to settle back down.”
A few weeks ago, mortgage rates were below 6%. They are now hovering around 6.5%, making affordability tight in much of the US housing market.
Rising energy costs are squeezing homebuyers’ budgets
Higher oil prices typically spill over into the economy, driving up the cost of transportation, manufacturing and everyday goods – pressures that can weigh heavily on aspiring homeowners.
“We are a petroleum-based economy, and when the price of petroleum increases nearly 40% in less than three weeks, it creates price inflation in every part of our lives wherever we look,” Cohn said.
For many buyers, those higher costs directly compete with saving for a down payment or qualifying for a mortgage.
“If you’re having difficulty paying your food bills, you’re not likely to buy a home,” Cohn said. “If you have to use your savings because gas prices are too high, and every repair you do costs too much, that’s a lot less money for you to buy a home.”
High ownership costs exceed the purchase price
Not only is it becoming more challenging to afford the initial cost of purchasing a home, but it is also becoming more challenging to afford the maintenance costs.
“Home heating costs will become more expensive,” Cohn said. “All the ancillary costs associated with housing will become more expensive.”
That combination — higher mortgage rates and rising maintenance and utility expenses — could prompt some buyers to delay a purchase or exit the market altogether.
Market volatility is reducing the purchasing power of home buyers
When financial markets become unstable, people’s ability to purchase a home can also be affected.
“We’ve seen a lot of volatility in the market, so some equities have declined,” Cohn said. “People have lost money, and if you have a money loss, you have less desire to take the money you have and put it into real estate.”
For buyers who rely on investment portfolios for down payments or closing costs, market losses can quickly derail home ownership plans.
For some buyers, fewer competitors may mean better deals
While the Iran conflict and rising rates may sideline many buyers, those who are financially secure may find opportunity.
“As rates rise, the affordability factor gets worse – fewer people can afford to buy a home,” Cohn said. “It’s very possible that this could mean that prices will go down because there are fewer buyers. If a seller has to sell and there are fewer buyers, they will have to lower their price to sell the home.
“This could be a buying opportunity for those who are still standing.”