With the earnings and economic data fronts relatively quiet this week, we are highlighting an area feeling the direct, compounding impact of the Middle East conflict: The housing market.

Just as the critical spring buying season begins, mortgage rates are on the rise again, diffusing some of last month’s buyer optimism.

Last week, the Federal Reserve made it clear they are in no rush to lower benchmark interest rates. Frankly speaking, officials aren’t in a rush to do much of anything until they have more clarity on the war in the Middle East. But for the housing market, the issue isn’t just that the Fed is keeping rates steady, but that mortgage rates are actually heading back up after dipping below 6% for the first time since 2022.

The recent upward pressure on borrowing costs has a couple of different drivers. First, the war in Iran has pushed crude oil prices much higher, which in turn has revived fears of higher inflation. In response, Treasury yields, which can be roughly decomposed into an inflation expectation and a real (i.e. inflation-adjusted) yield, have risen. And since mortgage rates loosely track the 10-year Treasury yield, home loan costs have naturally risen alongside.

But there is a second layer to this dynamic. The spiraling impact of the war has weighed on investor sentiment, and that has contributed to mortgage rates rising more than underlying bond yields. Here’s how:

1.    Sentiment shift: Investors become more risk-averse.

2.    Flight to quality: Capital incrementally moves out of “riskier” mortgage-backed securities (MBS) and into “safer” Treasury securities.

3.    Secondary Market Sell-off: Lower demand for MBS causes those market prices to drop, sending yields higher.

4.    Spread Widens: The gap between MBS and Treasury yields grows.

5.    Primary Market Adjustment: Mortgage lenders raise rates on new loans to match the higher yields demanded by the secondary market.

Broader housing market context is important here: Before the war broke out, mortgage rates had been falling steadily for about nine months. The average 30-year fixed rate had just dropped below 6%, removing what some economists consider an important psychological barrier for buyers.

But we are already seeing the toll the about-face in rates is taking. Housing sales data released last week was somewhat disappointing, suggesting that home affordability remains a concern, keeping would-be buyers on the sidelines. Plus, the "lock-in" effect — where current homeowners aren’t willing to sell because they’d be abandoning their ultra-low pandemic-era rates — is still a powerful force, restricting inventory.

For investors, the trajectory of mortgage rates over the coming weeks will serve as a key barometer for consumer resilience. If rates stay up, it could continue to chill demand, potentially putting pressure on the stocks of related industries like home improvement retailers, mortgage lenders, and homebuilders.

On the Docket

Monday

•   February Chicago Fed National Activity Index: This is a monthly index put together that incorporates 85 indicators from four categories: production and income; employment, unemployment, and hours; personal consumption and housing; and sales, orders, and inventories.

•   January Construction Spending: Construction data is a leading indicator of business activity.

Tuesday

•   March Philadelphia Fed Non-Manufacturing Activity: The Philadelphia Fed’s survey of services executives in the region on business conditions and their outlook.

•   4Q Productivity and Unit Labor Costs: These measures provide a breakdown of how productive workers were per hour of work and at what cost.

•   March S&P Global US PMIs: These indexes track how purchasing managers across different industries feel about the business environment.

•   March Richmond Fed Manufacturing Activity: The Richmond Fed’s survey of manufacturing executives in the region on business conditions and their outlook.

•   March Richmond Fed Non-Manufacturing Activity: The Richmond Fed’s survey of services executives in the region on business conditions and their outlook.

Wednesday

•   February Import/Export Price Indexes: These indexes track the changes in the prices of nonmilitary goods and services traded between the U.S. and the rest of the world.

•   Weekly Mortgage Applications: Mortgage activity gives insight on demand conditions in the housing market.

•   Earnings: Cintas (CTAS), Paychex (PAYX)

Thursday

•   March Kansas City Fed Manufacturing Activity: The Kansas City Fed’s survey of manufacturing executives in the region on business conditions and their outlook.

•   Fedspeak: Vice Chair Philip Jefferson will discuss the economy at a Dallas Fed event.

Friday

•   March University of Michigan Consumer Sentiment: How consumers feel about economic conditions affect their spending habits. This survey places a particular focus on inflation and its trajectory.

•   March Kansas City Fed Non-Manufacturing Activity: The Kansas City Fed’s survey of services executives in the region on business conditions and their outlook.

•   Fedspeak: San Francisco Fed President Mary Daly will give opening remarks at the regional Fed’s Macroeconomics and Monetary Policy Conference. Philadelphia Fed President Anna Paulson will give a speech at the San Francisco Fed event.

•   Earnings: Carnival (CCL)

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