The cost of US home loans has surged to its highest level in nearly a year, with ongoing hostilities in Iran fueling inflation anxieties, while the Federal Reserve holds rates steady but signals a potential tightening bias, clouding the outlook for the housing market.

Data released Thursday by mortgage giant Freddie Mac showed the average rate on a 30-year fixed mortgage rose to 6.66% from 6.58% the previous week, the highest reading since July 31, 2025.

The current rate marks a significant rebound from a near-term low of under 6% seen at the end of February. The conflict in the Middle East, leading to higher energy prices, is seen as a primary driver of this upward trend.

The Federal Reserve decided to keep its benchmark interest rate unchanged at its Wednesday meeting, though three officials voted in favor of a rate hike. In response, the yield on the 30-year US Treasury bond climbed to its highest level in nearly 19 years, while the 10-year yield also hovered near a one-year peak. With continued upward pressure on borrowing costs, there is very limited room for mortgage rates to ease in the near term.

In terms of market impact, data from Redfin indicates that the number of signed contracts for existing US homes fell to its lowest level since early April in the four weeks ending July 26. At the same time, the divergence in sales performance between luxury homes and entry-level properties is becoming more pronounced, highlighting deep-seated economic inequality within the US housing market.

Iran Conflict and Inflation Expectations Drive Treasury Yields Higher

The rise in mortgage rates is closely tied to the recent surge in US Treasury bond yields, with geopolitical uncertainty acting as a key catalyst.

Anthony Smith, a senior economist at Realtor.com, noted that hopes for peace talks with Iran, which briefly surfaced in early July, have now collapsed. "The market is once again reacting to uncertainty, and the inflationary pressure from conflict-driven higher oil prices is also playing a role," he said.

On the monetary policy front, the Federal Reserve's decision on Wednesday to hold rates steady was met with dissenting votes from three officials in favor of a hike, increasing pressure on Fed Chair Warsh to pursue further tightening actions.

Smith pointed out that with the Fed's next move more likely to be a rate increase than a cut, the chance of any near-term relief on mortgage rates is extremely low.

Housing Market Enters Seasonal Slowdown as Sales Volume Faces Headwinds

Persistently high borrowing costs have left a clear mark on the housing market.

The current uptrend in mortgage rates began in late February, when rates briefly dipped below 6%. They have since climbed steadily amid rising tensions in the Middle East, leading to a disappointing performance during the traditional spring home-buying season, with the market remaining weak ever since.

Lisa Sturtevant, chief economist at Bright MLS, commented after the Fed meeting, "Homebuyers are waiting to see how things unfold, and at the same time, the market is entering a seasonal slowdown."

She also noted that while most indicators point to sluggish transaction activity, there could be a surprise uptick in late-summer demand if some buyers rush to lock in deals out of fear that rates will climb even higher.

Luxury vs. Entry-Level Homes: A Widening Divide

Under the weight of macro pressures, the internal fragmentation of the US housing market is becoming increasingly apparent.

According to a report from Zillow, sales of luxury homes rose 6.2% year-over-year in May, while sales of entry-level homes fell 5.4% during the same period. A higher proportion of luxury home buyers pay in cash, making them less sensitive to interest rates, which partly explains the divergence between these two asset classes.

This divide is most stark in San Francisco. The ongoing wealth effect from AI companies' stock performance has propelled luxury home sales up by 21.6%. In contrast, entry-level home sales only saw a modest 1.2% decline, though more sellers have started to reduce their asking prices.

Kara Ng, a senior economist at Zillow, stated, "Today's entry-level buyers have more choices, more bargaining power, and are encountering sellers who are more willing to negotiate. The challenge is that the same financial pressures making it harder for them to save for a down payment are also making it tougher for them to seize this opportunity."