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The Iran war hangs heavily over the housing market, tempering expectations for what many had hoped would be a strong spring selling season. While home buying is likely to improve modestly over the course of the year, sales will still run at a sluggish pace on account of challenging affordability and elevated economic uncertainty that continue to discourage prospective buyers.
Many buyers remain on the sidelines due to elevated mortgage rates, which have surged as Treasury yields climb. The average mortgage rate for a 30-year fixed loan finally dipped below 6% in late February, for the first time since 2022. However, rates quickly rebounded in mid-March to their highest level since September, just a few weeks after the Trump administration’s announcement of the U.S.-Israeli attack on Iran.
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While mortgage rates currently remain in the low 6% range, the conflict is injecting significant volatility into the market. If the fighting drags on, rates could be pushed even higher. This environment, combined with weakening consumer confidence, is undermining buyer sentiment during the critical spring selling season. While this season is shaping up to be slightly better than last year’s — when rates hovered near 7% and trade policy volatility dented confidence — the recovery remains fragile.
Tepid sales and historical lows
Existing-home sales will remain tepid throughout 2026. Data show sales have averaged a 4.0 million-unit pace in the three months ending in January, which is approximately 37% below the peak pace hit in late 2022 and 20% below the 2019 average. While a jump in sales in December offered an encouraging signal, the subsequent slump in January and the minor gain in February confirm that the housing market isn’t yet on solid footing.
The market’s struggle to maintain momentum is hardly surprising, given how extremely stretched housing affordability has become over the past few years. Mortgage payments for first-time buyers are still near the highest levels since the 1980s (adjusted for inflation). Not surprisingly, the share of first-time home buyers in the housing market fell to a historic low of 21% last year, down from 31% in 2020. Meanwhile, the median age of first-time home buyers rose to an all-time high of 40, up from 33 in 2020.
The “lock-in” effect and pricing
Single-family inventory is increasing at a sluggish pace as many owners feel “locked in” by pandemic-era mortgage rates. These homeowners are often unwilling or unable to sell, as doing so would require taking on a new mortgage at a much higher rate. Currently, about 80% of outstanding mortgages carry rates below 6%, and nearly a third are between 3% and 4%. This issue is most prevalent in pricey coastal markets.
According to Redfin, these conditions are keeping price growth in check. The share of homes sold below asking price last year rose to the highest level since the pandemic, while the average discount was the highest since 2012. In 2025, the number of home sellers exceeded prospective buyers by the largest margin in over a decade.
Headwinds for home builders
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The conflict in Iran poses significant challenges to the home building sector. Sustained high oil prices are expected to increase input costs while simultaneously weakening demand through lower consumer confidence and higher mortgage rates. Oil-based products, including asphalt, plastics and vinyl, face immediate price pressures, as well as energy-intensive manufactured products like insulation, drywall and cement.
Builders continue to grapple with excess inventory, prompting pullbacks in single-family permits. Building permits have been flat-to-down over the past three years. In fact, housing starts hit a five-year low in October 2025. Meanwhile, weak new-home sales have pushed inventories higher. Supply stands at 7.6 months at the current sales pace, well above a healthy market of six months. As a result, 37% of builders cut prices in March, up from 29% a year ago.
Policy responses
Policymakers have introduced various remedies, but their effectiveness remains an open question. One strategy involves the president’s order to Fannie Mae and Freddie Mac to buy more mortgage-backed securities to increase liquidity. Another proposal focuses on limiting institutional investor purchases to less than 20% of single-family homes. However, critics point out that only about 2% of the market is actually captured by big institutional investors, suggesting such measures may have a limited impact on affordability.
This forecast first appeared in The Kiplinger Letter, which has been running since 1923 and is a collection of concise weekly forecasts on business and economic trends, as well as what to expect from Washington, to help you understand what’s coming up to make the most of your investments and your money. Subscribe to The Kiplinger Letter.
