Elevated energy prices and shifting inflation expectations, fueled by the conflict in Iran, continue to push up borrowing costs for American homebuyers, putting additional pressure on mortgage demand.

According to data released by the Mortgage Bankers Association (MBA) on Wednesday, the contract interest rate for a 30-year fixed-rate mortgage rose by 6 basis points to 6.85% during the week ending September 4th, reaching its highest level in over a year. Since the outbreak of the Iran conflict in late February, this rate has climbed approximately 75 basis points, with inflation pressures driven by higher energy prices serving as the primary catalyst.

This surge in lending costs is weighing on demand. The MBA's refinance index has dropped to its lowest point since May 2025, mortgage application volumes continue to shrink, and home purchase demand is also showing signs of weakening.

Consumer price data scheduled for release this Friday is expected to show that the overall inflation rate rose 3.4% year-over-year in August, with rising energy costs being a major contributor. Federal Reserve officials are closely tracking these inflation trends as they evaluate the direction of future interest rate policy.

Rate Surge Rooted in US-Iran Conflict

Prior to the onset of the Iran conflict, US mortgage rates had fallen to their lowest levels since 2022.

Following the start of hostilities, rising energy prices intensified inflation concerns, dampening market expectations for Federal Reserve rate cuts and driving borrowing costs steadily higher. As of last week, the 30-year mortgage rate had increased by approximately 75 basis points from its pre-conflict low, reaching 6.85%.

In contrast, the rate for a 5-year adjustable-rate mortgage (ARM) eased last week, falling to 6.13%, as some borrowers shift toward variable-rate products to cope with persistently high fixed-rate costs.

Loan Demand Softens

The elevated borrowing costs have created a notable drag on the housing finance market. The MBA's refinance index decreased by 6.2% last week, touching its lowest level since May 2025. Meanwhile, the MBA's purchase index, which measures new home loan applications, saw a slight 0.2% dip from the previous week.

The contraction in refinancing activity is particularly pronounced. Since refinancing is highly sensitive to interest rate fluctuations, the sustained upward trend in rates is preventing borrowers who had hoped to reduce their monthly payments from doing so.

Markets Eye Inflation Data and Fed's Next Move

Market attention is now firmly fixed on Friday's release of the August CPI figures. Expectations suggest that, propelled by energy prices, the headline inflation rate will register a 3.4% annual increase. This data will serve as a critical input for Federal Reserve officials as they assess the inflation outlook and deliberate on the future path of interest rates.

The Fed currently faces a dilemma: it must contend with supply-side inflationary pressures stemming from the conflict, while also balancing considerations for economic growth and the strain on the housing market. The trajectory of mortgage rates will largely hinge on the policy signals emerging from the central bank in the coming weeks.

The MBA's weekly mortgage survey, which has been conducted since 1990, covers responses from mortgage bankers, commercial banks, and savings institutions, and accounts for more than 75% of all retail residential mortgage applications in the United States.