Mortgage

What a U.S.-Iran war would mean for mortgage rates

News of drone strike killing Iranian leader is causing a "flight to safety," driving down interest rates

A U.S. drone strike that killed a top Iranian military leader sent American stock markets tumbling and crude oil prices spiking. What effect is it having on mortgage rates?

Rates on 30-year fixed mortgages fell more than an eighth of a percentage point on Friday as investors piled into bond markets in a “flight to safety,” said Mark Goldman, a loan officer with C2 Financial Corp. in San Diego.

What rates do next week depends on how “scared” the markets get, he said.

“Whenever there’s a big event that causes a scare, internationally or nationally, interest rates go down,” Goldman said in an interview. “Will they stay down? That depends on what happens next. Will we see news that frightens the markets, or is it going to be business as usual?”

An increase in competition for bonds such as mortgage-backed securities means investors have to accept lower returns, which results in cheaper rates for home loans. The U.S. 10-year Treasury note, which acts as a loose benchmark for mortgage rates, sank on Friday.

Even if mortgage rates stay low, or head lower, a war with Iran wouldn’t be a boon for the lending and housing markets long-term.

A protracted conflict with Iran could be devastating – not only in terms of lives lost, both military and civilian, and the general misery of war – but to economies as well.

“The major escalation of tension between Iran and the U.S. threatens oil supplies, threatens consumer and business sentiments, and therefore threatens the global economy,” Mohamed El-Erian, chief economic advisor Allianz said in an MSNBC interview.

Most people won’t make a big-ticket purchase like a house, and thus won’t need a mortgage, if they are feeling uncertain about their economic prospects.

There’s also the long-run effect on the U.S. budget. The U.S. debt reached a record $22.7 trillion in the third quarter, almost $1 trillion more than the beginning of 2019. That could spark an inflationary cycle that would send mortgage rates spiraling higher.

“The U.S government debt is currently on an unsustainable path,” according to a Nov. 26 report from the Federal Reserve Bank of St. Louis. “Trends that are unsustainable will not continue because the economy will adjust, sometimes in abrupt and jarring ways.”

As one example, the Iraq War cost taxpayers more than $1 trillion. The primary reason for the invasion – the claim that Iraq possessed and would use weapons of mass destruction – turned out to be baseless.

If there’s going to be a protracted war with Iran, where is the money coming from? Not from corporations. After the Republican tax cut in late 2017, tax payments by corporations in 2018 fell to a 16-year low, according to the Bureau of Economic Analysis.

“How would we finance a war?” Goldman said.”If it becomes expensive, if the government is borrowing more and more money, that would mean we’d see higher mortgage rates.”

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