Ryan O’Malley, the head of portfolio management for Los Angeles-based Ducenta Squared Asset Management, said in commentary last week that mortgage rates have been closely tracking increases in the 10-year Treasury yield, which have been influenced by rising oil prices prompted by the ongoing military conflict in Iran.
“The best case scenario for mortgage rates would be a swift resolution to the Iran conflict, which would likely result in Brent Oil prices dropping back to the $80/barrel range, causing interest rates and mortgage spreads to drop in tandem,” O’Malley said. “Such a resolution could happen in the next 30 days, but if the conflict drags through the rest of the year, mortgage rates could stay in the mid 6% range which would likely dampen demand for housing and consumer loans.”
HousingWire Lead Analyst Logan Mohtashami noted this week that mortgage spreads remain in a more narrow range compared to the past three years. The 6.64% rates seen late last week, for example, would be more than a full percentage point higher if spreads were as wide as they were in 2023.
Affordability takes a hit
Data released Tuesday by First American shows that housing affordability started 2026 at its highest level since August 2022. The company’s Real House Price Index (RHPI) — which adjusts single-family home price changes for fluctuations in household incomes and mortgage rates — was almost 11% lower year over year in January.
First American chief economist Mark Fleming explained that a 90-bps decline in mortgage rates, relatively flat home price appreciation of 0.6% and income growth of 3.1% during the year combined to spur improved affordability. But he cautioned that future data will be less encouraging.
“Mortgage rates have recently moved higher, driven by geopolitical uncertainty and rising energy costs that are contributing to inflation concerns. The uptick in mortgage rates is likely to blunt improvement in affordability,” Fleming said.
“However, affordability is not determined by mortgage rates alone. Income growth and house price trends remain critical. If price growth stays subdued, or declines continue in some markets, and incomes keep rising, those factors can help offset, or at least mitigate, the impact of higher mortgage rates. Ultimately, affordability is determined by the interplay between mortgage rates, home prices and household incomes, and how those forces evolve across local markets.”
On Tuesday, the S&P Cotality Case-Shiller Index showed softening home price appreciation at the national level, with the 0.9% annualized gain in January down from a 1.1% gain in December. Among the markets on the 20-city index, New York City and Chicago saw price growth of 4.9% and 4.6%, respectively, while Tampa posted a 2.5% decline.
Inflation could get stickier
A report released last week by the Organisation for Economic Co-operation and Development (OECD), an international policy development group, concluded that “inflation pressures will persist for longer.”
Across the G20 nations, the group projects that inflation in 2026 will rise to 4% — up from 2.8% in its previous forecast. U.S. inflation is expected to rise to 4.2% this year, up from 2.6% in 2025, before subsiding to 1.6% in 2027. But these projections could become even gloomier.
“Market expectations point to a gradual decline in energy prices, an assumption underpinning current projections,” the OECD explained. “However, a prolonged disruption to shipments through the Strait of Hormuz or sustained closures of oil and gas facilities could lead to significantly worse outcomes.”
At the Federal Reserve, cuts implemented in 2024 and 2025 brought benchmark rates down by a total of 175 bps. But growing inflationary threats have all but ended hopes of further cuts in the near future.
According to the CME Group’s FedWatch tool, 97% of interest rate traders expect the Fed to take no action on rates at the end of April. That compares to 75% who expected no cut at the end of February. Similar levels of pessimism can be observed in the outlook for the Fed’s June and July meetings.
A recent push by Fannie Mae and Freddie Mac to purchase billions of dollars in mortgage-backed securities could nudge rates lower, although market experts say macroeconomics, include the current geopolitical situation, will outweigh that move.
Likewise, policy shifts to reduce the size of the Fed’s balance sheet could also accomplish that task, something Fed Gov. Stephen Miran touched on last week during a speech in Miami.
“Contractionary economic effects of balance sheet reduction can be offset with a lower federal funds rate, so long as we are not at the effective lower bound,” Miran said. “It is therefore likely that a resumption of balance sheet reduction warrants additional reductions in the federal funds rate relative to baseline projections.”