How Does Oil Impact Your Mortgage Rate? 🏠

The image displays a line graph depicting the U.S. average 30-year fixed-rate mortgage rates from 2022 to 2026. The rates fluctuate between 3% and 8%, with a current rate indicated at 6.38%. The data is sourced from Freddie Mac and The New York Times.

What the War with Iran Means for Mortgage Rates

Few decisions have further-reaching effects than when nations enter escalating conflicts. For those in the U.S., these past few weeks have seen the impact of the decision to enter a war with Iran.

A recent New York Times article wrote, “The average 30-year, fixed-rate mortgage rate climbed to 6.38 percent, according to the mortgage-financing giant Freddie Mac, up from 6.22 percent the week before and the highest level since the first week of September […] Until the war started, rates had been gradually declining, falling below 6 percent in the last week of February.”

This means that if the war continues, the housing market will continue to be affected.

To help get a deeper understanding of what this means for real estate professionals, KellerINK spoke with Ruben Gonzalez, Keller Williams’ chief economist. Based on his expertise and additional economic research from Isaiah Tabach, here’s what you need to know:

1. Oil Shocks Can Lead to Inflation

Historically, oil supply shocks have slowed growth and led to recessions. The impact will hit industrial economies hardest as they are the most dependent on oil. But the length of the shock and impact depend on what caused the shock in the first place. There are two types of shocks:

Supply shocks
Demand shocks

A supply shock is driven by something disrupting the supply chain for oil that reduces what’s available to the market, thereby driving up prices. Perhaps the most famous examples are the OPEC embargo in 1973 and the Iranian Revolution in 1979.

A demand shock is when some shift in the global economy, perhaps new technology or just strong economic growth driving consumer demand for goods, ratchets up purchasing of oil faster than supply can adjust. This can also be driven by speculation. The 2007-08 oil shock prices reflected a surge in demand, a lot of which was market speculation. This shock rose and fell quickly, taking oil prices above $130/barrel and then down to $40/barrel.

The two kinds of shocks impact the economy in different ways. For supply shocks, it's the sudden lack of oil that causes everything to stop. Only once the supply is restarted can the engine begin again.

In a demand shock, it’s consumer behavior and the current capability of the economy that causes the change in oil prices. They can spike when demand is high — when we want to go fast — and then they sink when we slow down.

For both supply and demand shocks, the most pain will be in the short term while over a longer period people’s behavior will start to adjust to reduce demand. (They drive less.)

So is the war on Iran a supply or demand shock?

“Looking at the current situation, it’s clear that what we’re seeing is a supply shock more similar to the ’70s than to 2008,” Ruben concludes.

This means that demand for oil hasn’t increased; more people aren’t suddenly wanting oil. Instead, oil is blocked. Until the blockage is eased, we’ll remain in the shock and the housing market will be affected.

2. Inflation Leads to Higher Mortgage Rates

If you look at the chart below, you’ll see a blue line that represents oil prices and a purple line that shows mortgage rates. It appears that oil supply shocks have frequently led mortgage rates up.

Graph indicating Oil Prices and Mortgage Rates Year over Year Changes from 1987 through March 2026

Now, mortgage rates and oil prices aren’t directly linked. The price per barrel isn’t connected in any way to how mortgage rates are set. Its oil’s impact on other parts of the economy that connects it to mortgage rates.

High oil prices generally lead to inflation because everything in the economy that depends on oil gets more expensive to produce. If it costs more to fill the tank of the truck that drives something like doorknobs from the factory to the hardware store, then the price of that product will likely go up. This happens because the manufacturer must increase prices to maintain the same level of profit. The manufacturer made this decision, not the oil industry. So the higher price is not explicitly caused by oil, but oil is a factor.

A doorknob is just a single part of a house. Imagine what rising costs may look like for home builders that then pass on to potential buyers. In this way, oil shocks indirectly lead to overall inflation and slowed growth virtually everywhere, because most of the world’s economy depends on oil in some way.

3. Inflation Affects the Federal Funds Rate

Oil shocks are inflationary to the economy, and that makes them a priority for the Federal Reserve.

The Federal Reserve’s primary purpose is to enact policy that manages inflation, encourages employment, and ultimately stabilizes interest rates. When we say interest rates, we’re talking about federal funds rates.

Federal funds rates are set by the Federal Open Market Committee, which establishes a kind of baseline for individual banks to later determine their own interest rates.

The federal funds rate is the rate that banks pay each other to borrow money overnight. Essentially, the government requires banks to have a certain amount of money within their reserves and when banks lend funds to borrowers, they then have to re-balance their reserves to meet these requirements.

So, if the federal funds rate increases, chances are that banks will increase the interest rates that they charge borrowers in order to pass along the cost. Similar to how manufacturers pass inflationary costs onto their consumers.

You can see this lock-step relationship in the chart below, where the 10-Year Treasury Yield is in blue and mortgage rates are in yellow:

Graph indicating U.S. Treasury Yields over the last ten years

According to economic researcher Isaiah Tabach, “There’s usually a 2 percent add-on [to mortgage rates] from the Treasury Yield, and this tends to widen in times of economic challenges.”

What Does This All Mean for Mortgages?

So far in 2026, the Federal Reserve has been hesitant to lower interest rates because of the rate of inflation in the US economy. There are fears as a result of the current oil shock that interest rates could rise to counteract any additional inflation.

Fed Chair Jerome Powell said recently that the organization was taking the view that the energy crisis could be short-lived. If that’s the case, any monetary policy wouldn’t be able to offset any negative effects that quickly, and so may not be necessary. However, he did imply that if the shock lingers, some action may be needed in order to help the overall economy.

In the short-term this means that mortgage rates are likely to remain relatively stable. However, if the war in Iran continues to block the flow of oil to the US and the rest of the world, we may see mortgage rates rise as a result of efforts to curb inflation.

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