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Though the housing market is never immune to political and economic volatility, mortgage rates have been eerily calm. Over the last month, the average rate for a 30-year fixed mortgage has moved in a narrow range between 6.8% and 7%.
An escalating war in the Middle East could spark fresh volatility across global markets, significantly affecting oil prices and the US dollar. That would have a ripple effect on long-term Treasury yields and mortgage rates.
Mortgage rates had been expected to gradually improve in 2025, but the Trump administration's inflationary tariffs, deficit spending and geopolitical maneuvering led to bleaker forecasts. Most economists now say average mortgage rates will stay above 6.5% for the better part of the year, keeping many prospective homeowners away.
"You'd need to see mortgage rates pretty far below current levels, certainly below 6.75%, to incentivize homebuyers," said Beth Ann Bovino, chief economist at U.S. Bank.
Fed rate cuts still on the agenda
Despite widespread pleas for lower consumer borrowing costs, including from the White House, the Federal Reserve held interest rates steady again at its monetary policy meeting on June 18.
The prolonged pause in rate cuts gives the central bank some time to assess numerous wild cards: the labor market, price growth and an evolving conflict with Iran.
The Fed is tasked with maintaining maximum employment and containing inflation, primarily through setting its short-term benchmark interest rate for lenders. A sluggish economy typically warrants interest rate cuts to stimulate growth, but lowering rates too quickly could fuel price growth when inflation is still above target.
The central bank could cut rates as early as this fall, especially if rising jobless claims and slowing economic growth force its hand. At the same time, other factors, including the current conflict in the Middle East, could quash hopes of rate cuts, pushing them off until next year.
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