Prolonged U.S.–Iran war heightens inflation concerns
Mortgage rates follow Treasury yields above 7%
As demand weakens, cuts to asking prices and new-home prices spread

As the war in Iran drags on and inflation fears mount, the U.S. 10-year Treasury yield has broken through 5%, followed by the 30-year mortgage rate crossing the 7% threshold. Buyers struggling to afford interest payments are postponing home purchases, leaving listings to pile up and prompting both homeowners and builders to cut prices to attract buyers. Sluggish transactions are leading to price reductions, but war-driven inflation concerns and the U.S. debt burden are pushing interest rates higher, maintaining pressure on the housing market. In particular, concerns are growing that if peace talks fail to achieve a breakthrough and uncertainty over crude oil supplies persists, high interest rates could suppress buying demand and intensify downward pressure on home prices.

U.S. Home Purchase Contracts Fall 8.5% as Mortgage Rates Jump

According to U.S. government-sponsored mortgage finance company Freddie Mac on the 13th (all dates hereafter are local time), the average 30-year fixed mortgage rate stood at 7.40% annually as of the 8th, rising for a seventh consecutive week to its highest level since November 2023. That was up another 0.12 percentage points from 7.28% the previous week and 1.10 percentage points higher than a year earlier. After falling to 5.98% in late February this year, the rate jumped 1.42 percentage points in about seven months, increasing borrowers’ repayment burden. For a loan of USD 400,000 (approximately USD 412,308), that translates into an increase of USD 376 (approximately USD 385) in monthly principal and interest payments. Surging oil prices and inflation concerns stemming from the war in Iran have contributed to the rise in rates. As inflation concerns push up the U.S. 10-year Treasury yield, mortgage rates linked to it have continued to climb.

The increased burden of principal and interest payments is dampening demand for home purchases. According to real estate information company Zillow, the monthly mortgage payment on a typical U.S. home last month, assuming a 20% down payment, was USD 1,922 (approximately USD 2,000), up 6.7% from a year earlier. Including taxes, insurance, and maintenance and repair expenses, the costs a median-income household must bear after purchasing a home amount to 34.3% of its income. As monthly housing expenses grow, actual purchase contracts are also declining. Newly signed home purchase contracts last month fell 8.5% from the same month a year earlier, while the median time from listing to contract increased by two days to 29 days.

Home Prices Fall as Listings Pile Up, While Discounts on New Homes Spread

As the interest burden weakens demand, home sellers have begun lowering their asking prices. Zillow data showed that 27.4% of all listings last month had price cuts, up 1.1 percentage points from the previous month. In other words, more than one in four listed homes had their prices reduced to attract buyers. Listings awaiting buyers are also accumulating. Nationwide listings totaled 1.39 million homes last month, up 2.5% from the same month a year earlier, marking 34 consecutive months of increases. Home value indicators also show declines. The national home value index fell 0.5% from the previous month, while home values in Dallas and Houston dropped 1.9% and 1.8%, respectively, from a year earlier.

Builders are responding to price adjustments by existing-home sellers with discounts on new homes. According to the National Association of Home Builders (NAHB), 38% of builders cut prices last month, up 3 percentage points from the previous month. Their average discount was 6%. In addition to lowering prices, builders are expanding incentives such as mortgage rate subsidies and home upgrades at no additional cost. The share of builders offering such incentives rose from 63% in August to 66% in September. Despite rising construction costs caused by higher material prices and labor shortages, they are accepting additional spending to boost sales. As a result, industry sentiment continues to deteriorate. The NAHB/Wells Fargo Housing Market Index fell 3 points from the previous month to 32 in September, its lowest reading since September last year. The index reflects builders’ assessments of the market for new single-family homes; the further it falls below the benchmark of 50, the more negative assessments predominate.

Housing Market Slows When Real Interest Rates Exceed 4%

The decline in home transactions and the price cuts by sellers and builders are intertwined with real interest rates, which take inflation into account. The real interest rate is the nominal lending rate minus the inflation rate, meaning it rises when inflation slows even if the lending rate remains unchanged. As inflation’s effect of reducing the real value of debt weakens, borrowers’ real repayment burden increases. This burden reduces homebuying power, weighing on demand and prices. An International Monetary Fund (IMF) analysis of country-level data also found that a 1-percentage-point increase in real interest rates tended to slow home price growth by about 2 percentage points.

Higher real interest rates not only reduce the purchasing power of buyers seeking homes to live in but also affect demand for housing as an investment. This is because a home’s investment value is assessed by discounting future rental income and other returns to their present value, and interest rates are reflected in the discount rate used. Other things being equal, a higher discount rate reduces the present value of future income, meaning investors may be willing to pay less for a home even if its expected rental income remains unchanged. Federal Reserve researchers have also identified real interest rates, expected rental growth, and the risk premium required for housing investment as key variables in analyzing the relationship between home prices and rents. Their explanation is that interest rates, expected rent growth, and required returns reflecting investment risk all factor into housing valuations.

Inflation Concerns and Debt Burden Raise Fears of Prolonged High Interest Rates

Although the interest rate burden is weakening demand for homes, there is little room for lending rates to fall. Persistent inflation concerns as the war drags on are also tilting U.S. monetary policy toward further tightening. According to the minutes of the September Federal Open Market Committee (FOMC) meeting released on the 7th, participants judged that inflation had not declined sufficiently toward the 2% target in recent months. Based on that assessment, the Fed raised its policy rate by 0.25 percentage points at the September meeting, and most participants believed another increase would likely be necessary before year-end. While keeping the possibility of further tightening open, sentiment favored waiting in October to assess the effects of earlier increases. With inflation remaining elevated, however, there is limited room to pivot to rate cuts.

The U.S. fiscal burden is also increasing upward pressure on long-term interest rates. With national debt exceeding USD 40 trillion (approximately USD 38.46 trillion, USD 362 billion), government Treasury issuance and borrowing by major technology companies to finance artificial intelligence (AI) investments are intensifying competition for funding. If demand for bonds does not rise in step with supply, higher yields must be offered to attract investors. Long-term bonds, in particular, must compensate investors for the risk of losses caused by changes in inflation and interest rates over their lengthy holding periods. The additional yield required for this is called the “term premium.” When a rising term premium pushes up long-term Treasury yields, the government’s interest costs on newly issued debt increase even if the policy rate remains unchanged. Existing debt coming due must also be refinanced at higher rates, further increasing the fiscal burden.

Oil Supply Uncertainty Complicates Efforts to Stabilize U.S. Interest Rates

If long-term interest rates rise further, losses among bond investors could trigger forced selling, potentially heightening financial market instability. On the 9th, Dan Ivascyn, chief investment officer (CIO) at bond manager PIMCO, warned that bond sales by leveraged investors could push the U.S. 10-year Treasury yield to 6%. His explanation was that hedge funds and other investors facing mounting losses as rising yields drive down bond prices could sell large volumes of their holdings as they reduce their investment exposure. The resulting wave of selling could push bond prices down further, drive yields higher, and trigger additional selling. Ivascyn said that if such selling pressure pushed the 10-year Treasury yield to 5.5% or higher, stock and corporate bond markets would also suffer widespread damage. In particular, companies and commercial real estate borrowers needing to refinance maturing debt could struggle to secure the funds they need even while accepting higher interest costs.

An end to the war in Iran and the normalization of energy supplies remain key factors that could ease upward pressure on interest rates, but even these prospects are uncertain. U.S. President Donald Trump recently warned that attacks on Iran could resume after the midterm elections if negotiations fail to make progress. With peace talks delayed and the possibility of further military clashes remaining, concerns are growing that uncertainty over crude oil supplies could persist. An analysis by the Federal Reserve Bank of Dallas found that the longer oil supply disruptions last, the greater the impact of higher oil prices on U.S. inflation and households’ inflation expectations. This means that continued energy price instability could make it harder for the Fed to cut rates while also putting upward pressure on long-term Treasury yields.