Mortgage rates could potentially approach 7% if the combination of war-driven oil supply shocks and a hawkish Federal Reserve intensifies. While the average 30-year fixed rate hit an annual low near 6% early in the year, escalating tensions in the Middle East have driven rates back up to between 6.5% and 6.75%.

The ceiling for how much higher mortgage rates can go depends entirely on how the Iran conflict and the Fed interact through the following mechanisms.

1. The Iran Conflict: The Inflation Catalyst

The war has triggered major disruptions in global energy supplies, particularly around key chokepoints like the Strait of Hormuz. This acts as a direct catalyst for higher mortgage rates:

- Energy Cost Pass-Through: Spiking oil and diesel prices inflate transportation and production costs across the economy. The Survey of Professional Forecasters warns that consumer price inflation (CPI) could surge closer to 5% or 6% in the near term.
- The Bond Market Reaction: Mortgage rates are more closely tied to the 10-year Treasury yield than the Fed’s short-term rate. As global energy uncertainty and inflation risks spike, investors demand higher yields, driving up the 10-year Treasury and forcing lenders to raise mortgage rates.

2. The Fed’s Pivot: Hikes Are Back on the Table

The Federal Reserve’s battle against inflation has been deeply complicated by these geopolitical events.

- The Death of Rate Cuts: At the start of the year, markets anticipated multiple rate cuts. Instead, the Fed has been forced to pause cuts entirely, holding its benchmark rate steady at 3.50% to 3.75%.
- Potential Rate Hikes: Minutes from recent Fed meetings reveal that policymakers are willing to consider raising interest rates if supply shocks keep core inflation elevated. If the Fed executes an unexpected rate hike to combat oil-fueled inflation, mortgage rates will almost certainly breach the 7% threshold.

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