By Jeff Lazerson | jlazerson@mortgagegrader.com | MortgageGrader.com | May 26, 2026

Article originally posted in Orange County Register on May 21, 2026

How much will the war with Iran rankle the housing market? 

Some economists expect 7% rates if the war isn’t over by the end of June.

Mortgage rates are going crazy. And not in a good way.

This week the Freddie Mac 30-year fixed rate hit 6.51%. Less than three months ago on Feb. 26, the rate was at 5.98%. That’s an increase of 53 basis points in an incredibly short period of time. Holy smokes!

The war with Iran and the subsequently higher oil prices are triggering a bond market selloff.

So, it’s time we turn to the economic experts and ask them where we are we headed. I polled seven of them about the war and its effect on consumers in respect to mortgages and housing.

Mark Fleming, the chief economist at First American, called the war an “exogenous shock.”

“Mortgage rates could be pushing closer to 7% this year. Higher mortgage rates dampen demand,” he told me. “My best guess is no change to short-term rates.”

On housing market challenges, he said construction of new houses is not keeping up with demand (and new household formation).

Since 1981 when rates were 18.1%, rates have steadily come down. This means that every time a homeowner sold and then bought another home, they were likely to benefit from a lower mortgage rate.

But since the pandemic’s low-rate environment faded, interest rates have been rising, creating what Fleming calls a “lock-in effect.”

Homebuyers are now seeing higher rates, a “trade-up effect,” if you will, which has locked homeowners in place with those low pandemic-era rates.

“We’ve never experienced the rate lock-in effect,” said Fleming. “This changes behavior.”

Others believe the Iran conflict is pushing the economy closer to stagflation.

Chen Zhao, head of economic research at Redfin, explained how simultaneously high inflation and stagnant or slow economic growth would hinder the marketplace.

“How long the Strait of Hormuz stays closed then determines the inflationary shock,” said Zhao. “The longer you have energy price shock, the longer it bleeds through the rest of the economy.”

Zhao thinks mortgage rates could fall if the war ends soon. “If it goes past June, I’m pretty worried,” she said.

So, should you buy or not? Zhao advises never to try to time the housing market (as a buyer). Housing is a personal choice based on life circumstances, she said.

Zhao said don’t expect a lot of bargains, either. It’s a tricky time to expect falling home prices with very few foreclosures.

Foreclosures across California and across the country are just a tiny sector of the housing market.

Christopher Thornberg, founding partner at Beacon Economics, believes the higher inflation numbers are a transitory (temporary) shock, and not a sustained one.

As for incoming Federal Reserve Chairman Kevin Warsh, Thornberg said, “He took the job by selling his soul to Trump. Cutting interest rates (as President Trump wants Warsh to do) is not liable to do a lot of good.”

Thornberg sees Warsh shrinking the Fed balance sheet through quantitative tightening.

Fannie Mae’s definition of quantitative tightening pushes mortgage rates higher because when the Fed shrinks its balance sheet, it stops actively purchasing mortgage-backed securities. This withdrawal increases the MBS supply on the open market, forcing private investors to demand higher yields, which translates to elevated consumer borrowing costs.

Mark Vitner, chief economist at Piedmont Crescent Capital, was the only economist with whom I spoke who confidently believes the war with Iran is going to end soon.

Pointing to the soft defense stock prices, he said, “I think a good deal is coming. Smart money smells the end of the war.”

Vitner expects the next Fed move to be a rate hike, not a cut.

He’s not alone in that assessment. The Fed’s meeting minutes also showed that bankers are not ruling out a rate hike if inflation continues to push higher.

Raymond Sfeir, director, Anderson Center for Economic Research at Chapman University, also sees the Fed increasing rates by one-quarter percent if the war goes on for two more months.

“Certainty is horrible under Trump. Businesses hate uncertainty,” Sfeir said. “He misjudged Iran’s reaction. He doesn’t know how to get out of it (the war).”

Sfeir sees a 2% home appreciation rate and mortgage rates slowly coming down by the end of the year.

Steven Thomas, chief economist at Reports on Housing, sees a balanced market (sellers and buyers) with a slight downward price pressure as inventory levels rise.

“The market is not going to crash,” Thomas said. “There will be no wave of foreclosures.”

What keeps Robert Kleinhenz, principal economist and founder at Kleinhenz Economics, up at night is the housing stock shortage.

Homeownership in California is 55% versus the national average of 65%, he explained.

Affordability adds to the challenges for California buyers. “High interest rates, limited supply equals low affordability,” he said.

Only 22% of California homebuyers have sufficient income to afford a median-priced home. That’s with a conventional mortgage and 20% down.

My thoughts?

It’s hard to predict or guess at what Trump is going to do in respect to the war with Iran. If the war goes on for another 30 days, I think mortgage rates are going to hit 7%. If mortgage rates hit 7%, I expect we’ll have a sharp decrease in home sales and mortgage purchase and refinance activity.

Even so, a homebuyer could use an adjustable mortgage, an interest-only mortgage or a permanent rate buydown to make the payment more affordable.

Then you just hope and pray mortgage rates eventually come down so you can refinance into a lower rate.

Jeff Lazerson, president of Mortgage Grader, can be reached at 949-322-8640 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.

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