Peace Deal Signed: Where Mortgage Rates Are Actually Headed

0:00The conflict in Iran put a dent in the spring housing market this year as uncertainty rose alongside mortgage rates. But as of this weekend, the U.S. and Iran have signed a memorandum of understanding aimed at calming tensions in the region and limiting economic damage. So what happens to the housing market now? Could this peace deal be the shot of life the market needs? Or are we in for more of the slog that we've been in for the last four years? Today on the show, we're going to unpack this and examine what a deal with Iran means for the economy and the housing market. Where does inflation go from here?

0:41What about interest rates and housing demand? And ultimately, what should investors be concentrating on in the second half of 2026? This is On the Market. Let's get to it.

0:57Hey, everyone. Welcome to On the Market. I'm Dave Meyer, Chief Investment Officer at BiggerPockets. Today on the show, we are tackling the big news from last week, the U.S. signing a tentative deal with Iran, or at least a pause in fighting to hammer out a long-term deal that will hopefully lead to a lasting peace and to help calm economic anxiety and the inflation that we've seen uptick over the last couple of months. And today we're going to talk about this on the show because as we have seen very clearly in the last year, geopolitical issues as far reaching as the Middle East can and certainly do impact housing and investor realities.

1:41This conflict has already made a big impact on real estate this year, and it's likely to continue to do so. So we all need to understand what is likely to happen next. So let's dive right in. First of all, let's talk about what happened last week. Over the weekend, something called the Memorandum of Understanding was signed. It is not a long-term deal. It's basically a 60-day extension of the ceasefire so that both parties have time to negotiate terms of hopefully a final long-term deal. And although there are many, many provisions in this document for real estate investors, for us and for the economy, really, the main thing that we should be taking note of is that the Strait of Hormuz is supposed to open.

2:29Like the U.S. lifts the blockade. Iran agrees to not threaten or attack tankers that are going through the Strait of Hormuz. And hopefully that will restore trade that has been bottled up for the last three months. And we all know this by now, right? Like this is a pretty big deal. We've seen oil prices go up. We've seen fertilizer prices go up and general inflation go up pretty rapidly over the last three months because normal shipping hasn't been happening. We've had what is known as a supply shock in many of the biggest industries in the entire world. And that is causing not just economic anxiety, but some real pain in the economy, not just here in the US, but across the entire world.

3:17Now, we're not going to get into this a ton today because this is a housing and economic show, but the deal notably doesn't include anything about nuclear weapons, which is obviously important. The fact that there isn't anything about nuclear weapons in there, to me, means that this deal is pretty tentative. It's a little bit fragile, right? We haven't hammered out some of the big, thorniest issues here. So I hope that we have a lasting peace, but there's still a lot of uncertainty about the long-term prospects of a deal and the Strait of Hormuz. All that said, for today's episode, we are going to presume the Strait of Hormuz is open in the next week or so and that it stays open for the rest of the year.

4:01So to me, the big question about the Strait of Hormuz opening really just comes back to inflation. I know we talk about this all the time, but this is so important to the entire economy, to monetary policy, to mortgage rates, to consumer confidence. So much of it comes down to inflation. So we have to ask ourselves, if we're wondering what happens next with the market, ask yourself first, what happens to inflation? Because inflation is crucial to the housing market in two ways. First, it impacts buyer demand, right? Because people are spending their money elsewhere, they just don't have money to go out and buy a home, or they don't have money to pay more for a rental that you just renovated and looks beautiful and you want to rent out.

4:43The second and more direct impact inflation has is on mortgage rates because when inflation goes up or even when inflation expectations go up, bond yields rise. And when bond yields rise, so do mortgage rates. And that's exactly what we've seen this spring. The war choked off oil and LNG and other materials that create bidding wars, right? There's not enough of that stuff. This is a supply shock. There's not enough supply That creates bidding wars for the remaining supply, and that pushes up prices. This is why you see the CPI, the Consumer Price Index, our primary measure of inflation in the United States, at 4.2 % year over year, which is more than double the Fed's target.

5:27And although inflation has been a problem, it seems like for five, six years now, the recent inflation spike, basically what we've seen in 2026, has been mostly driven by energy prices, by oil and liquefied natural gas. Not entirely, as we'll talk about in a minute, but a lot of what we've seen in the last couple of months and why it's gone up so quickly recently has been because of this supply shock. So then if inflation is what we really need to forecast and the driver of recent inflation is removed because the Strait of Hormuz is open and in theory oil will flow again, does that mean inflation will fall?

6:09And if so, when will it fall? There is an optimistic case to this, and an optimist would say, straight opens, inflation peaks sometime soon, probably in Q3 in the next couple of months, and then it starts to ease in the coming months, and by the end of the year, we're back down to where we were before the war. And that can certainly happen if the straight stays open, but I should say, that is not the consensus view. That is the optimist view of what's going to happen over the next couple months, but it's certainly possible. Like that does make logical sense. But the consensus view is more of what's called like I would call the quote unquote warm for a while theory, right?

6:51Like it's just going to stay warm, not hot. It's not going to accelerate from here. But it takes a little bit of time for inflation to work its way through the system. Oxford Economics, for example, a big forecasting firm, projects that the CPI is going to top out somewhere in the 4.5 % to 5 % range. Remember, we're at 4.2 % now. So that's going up, but not that much more. No one wants to see inflation at 4.5 % or 5%. That is a lot. It's above wage growth. It's not good. But we've gone up from basically 2 % to 4.2 % in three months. So seeing that it's going to level out, I think, is a relatively good sign.

7:34But what Oxford Economics is saying, even though it will peak in the next few months, it will probably not start really cooling till next year into 2027. So this is, I think, a realistic case. This is kind of the theory that I subscribe to. It's not the most exciting news, but it's also far below 9 % inflation that we had in 2022. It's just not a really quick fix. And if you're wondering why it's not going to just go back down, why I don't personally buy the optimist case as the most likely scenario right now, it's for two reasons. The first and foremost, when supply chains get disrupted like they have been, it takes a while for them to turn back on and to flow normally, right?

8:23There's this huge backlog of tankers that have just been sitting in the Strait of Hormuz. when you shut down an oil well. I didn't know this till like three months ago, but obviously everyone, maybe people know this now. When you shut down an oil well, it takes quite a long time to turn it back on. And so we're not going to get back to the same production and shipping levels immediately if the Strait of Hormuz opens. And I also think it's going to take a little bit of time for the Strait of Hormuz to open. There's tons of mines sitting in the water, right? They have to get rid of that. Shipping companies have to decide if they're willing to take the risk during a tentative peace treaty to send ships through the Strait of Hormuz.

9:02So I think it's going to take a while for oil to come back down specifically. The second thing that's going on is that the inflation number is not just driven by oil. That's why it went up so quickly. But there are other inflationary pressures in the economy that might not be going away. And there is evidence that this is what's happening, right? This isn't just my theory. If you look at the data, this kind of tells us that there are other things going on here. With inflation in the United States, we usually measure two numbers. We have the headline number, which is that 4.2 % CPI. And then there's something called the core CPI.

9:42And this is all prices except food and energy costs. So you strip out food costs, you strip out oil, LNG, electricity, because they're very volatile. And economists and forecasters use this core number to understand what's going on with more sticky prices. So things like goods and services that don't move as much as energy and food prices. And what we see, if you look at the CPI or you look at the PCE, which is another measure of inflation, it's actually what the Fed uses to measure. That's what they use to measure inflation. If you look at both of those, the core price, so even stripping out oil prices, even stripping out food prices, the core is going up.

10:32Core CPI was about two and a half in February. It's up to 2.9 % in May. So it's not crazy. That's how we know oil is the primary driver, right? Because the core hasn't gone up as much as the headline CPI. but it's moving in the wrong direction even though it doesn't include food or energy. The same thing is going on with the PCE, that's the Fed's measure of inflation. Core there is up 3.3%, another reason why we should not be expecting Fed rate cuts, which we'll talk about in just a second. So overall, what you should be taking away from this is that it seems that the inflation situation is more complex than just oil.

11:17So what is driving it? If it's not just oil and fertilizer and food prices, what's driving up inflation? Well, number one is tariffs, right? They are still contributing to higher prices. That is hopefully going to level off in the rest of the year, right? Because tariffs were implemented mostly in 2025. And the economic theory is that tariffs contribute to a one-time price increase. And so since most of them were implemented in 2025, those price increases have been working their way through supply chains and through pricing, and that will come to an end at some point. It might not go away completely, but the majority of the tariff price increase pressure will probably work its way through the economy over the next couple of months.

12:05So again, another reason why the consensus view about inflation is that it's going to stick around for the rest of the year, and then it will start to come down. Oil prices will come back to earth, and some of the tariff pressure will go away. But that is not the only thing contributing to inflationary pressure. We still have shelter prices up a lot. This lags a lot, but it's up 3.4%. That carries a lot of weight in the calculations of the core CPI, and so that's pushing it up. And then the third one that people don't really talk about as much, but economists care about a lot, and the Fed cares about a lot, is service inflation.

12:46In the economy, there are both services and goods. Goods are physical things that you can pick up and touch. Services are things like shelter, or like going to get a haircut, or getting your car fixed, right? The reason economists care about service inflation is because they are stickier. Usually, almost always, when you see service prices go up, they don't come back down. Goods are a little bit different. If a price of a car goes up, sometimes they go back down, right? We've seen that with used cars. They went up a lot during COVID. Now they come back down to earth. Goods are much more volatile.

13:23They're a little bit more flexible and ebb and flow with the economy. services, not so much. I don't know about you, but I've never seen my plumber lower their price once it's gone up. You know, if labor's 75 bucks an hour, it's never gone back down to 60 bucks an hour, right? I went and got my car fixed yesterday. The labor was$175 an hour, right? I don't think they're going back down just because the straight of Hormuz opened. And so this is something that the economists and the Fed care a lot about. And this is up. If you actually look at the CPI and the data, goods prices are actually flat.

14:00So that's good, right? Like it's good that goods are flat, but services are driving the core CPI. And that's why the Fed are going to be very conservative about this because rightfully, because they have evidence that that is stickier and harder to get rid of, which means they'll probably be more aggressive about fighting it. And this is really why there are skeptics about inflation coming down quickly, right? We got tariffs. We have oil that might take some time to come down. We have, I didn't even mention this, but AI data centers pushing up energy prices, right? Even though the Strait of Hormuz opens, electricity prices in the U.S.

14:40up 6 % this year, right? That's probably not going away anytime soon. Service prices won't go back down. Food prices are likely to keep going up for the rest of the year. So while there is a range of opinions here, I don't believe the most optimistic case is the most likely case. It could happen, but I think the most likely scenario is that inflation peaks in Q3. So that's sometime between July and September of 2026. but then it comes down pretty slowly and it takes a while to get back to where we were before the conflict in Iran started. Again, all of this is with the caveat that the peace deal holds.

15:22If it doesn't, inflation's gonna keep going up. But if the straight stays open, I don't really see any forecast or really see any logic that says inflation's gonna go up to six, seven, 8%. So that's the really good news here, right? We're gonna limit how bad it gets. The question to me is really how long it takes to get back down to normal because that's what's going to dictate mortgage rates, right? So what does this mean for real estate investors and for the housing market? We've got to take a quick break, but after that, we'll get into where mortgage rates are heading and what you should be doing as an investor.

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17:51Welcome back to On the Market. I'm Dave Meyer. Today on the show, we're talking about what happens now. Now that we have a memorandum of understanding with Iran and the Strait of Hormuz is set to open, what happens to mortgage rates and to the housing market? Before the break, I explained that to me, this is really all about inflation. If you want to forecast what's happening, what's going to happen, it really matters what's going to happen with inflation. And as I told you, I think the most likely case here is that it peaks sometime in the next couple of months, but it takes a while to come down.

18:26And so what does that mean for real estate? Well, first, to me, it means I don't think we're going to see rate cuts anytime soon. I actually don't really even think this truce matters all that much to the Fed. They track an inflation measure called the PCE, particularly the core PCE, and it has just been going up. It went up in March. It went up in April. It's going to go up in May. I know it's June, but the data takes a month. So it's going to go up in May. Right. And they need to see this come down before they make cuts. Ideally, they see it stop, come down for a couple of months and then they make cuts.

19:05But right now it is still rising. So the inflation rate is just too high for them to cut. And at the same time, the labor market is strong enough to give them the runway to do this. If the labor market was falling apart, they would have some hard decisions to make. But if you look at recent jobs numbers, they've been strong. The unemployment rate remains relatively low. And although the labor market is not perfect by any means, there's a lot of underemployment, there's a lot of things going on beneath the surface. it's good enough to allow them to keep the federal funds rate where it is. So don't expect rate cuts.

19:46But in recent shows, we've been talking about the fact that the Fed has been signaling that a rate hike is likely. They actually have been saying this pretty publicly. I saw something, I think it was Bank of America, said they thought there might be three rate hikes over this year. I am not so sure about that. To me, this might be the one thing the truce does to help interest rates in the short term is that I think knowing that some of the main pressure driving inflation will make the Fed more cautious to hike rates. Like if the straight-up moves remain closed, inflation kept going up, and that pressure was just building and building and building as shipping could not resume, they would have raised rates, in my opinion.

20:35But the fact that this is opening and there is a a path to lower inflation, to me, signals that they're probably going to be more patient with inflation. Not going to cut rates, but I think they're going to keep it what it is for longer. And so to me, that is the one good news that we're seeing here. So if you're expecting mortgage rates to fall now because the Strait of Hormuz is open and the Fed's going to cut rates, I wouldn't count on that. First, they aren't that closely correlated. So even if the Fed cuts rates, mortgage rates, they won't move because of that. And then secondly, they're probably not going to cut anytime soon.

21:15So don't count on that. But the question about mortgage rates is real. Could they actually come down for other reasons? Because as we know, Fed doesn't control mortgage rates. So could mortgage rates come down for other reasons? Well, they haven't, right? Even since the announcement, the 10-year treasury has actually gone up. The average rate on a third-year fixed is about 6.6%. So we haven't seen any relief at all, even since the announcement or the signing of the memorandum of understanding. And this tells us a lot. I think it tells us a lot about what the bond market thinks is going on. And it shows us that they don't think inflation is going away just yet.

21:59The bond market as a whole is saying, we're not sold that inflation is coming down immediately. And we are keeping yields higher in bond yields, right? If they believed inflation was coming down immediately, we would have seen bond yields fall and we would have seen mortgage rates come down. So this is why, again, the consensus view, it's not just me, it's not just the Fed or Oxford Economics, the bond market, pretty powerful, pretty economically savvy group of people, are saying that inflation is going to stay higher. So the truce is not going to cause the Fed to lower rates, and the truce has not caused bond yields to fall.

22:39So the question, could the peace deal help mortgage rates? Yeah, it could, but indirectly. It can help over time by removing the main catalyst for inflation, but directly, no. Until we see inflation come down, we cannot expect lower mortgage rates. And I know that is not the news most people wanna hear, but it is my honest opinion. We might see them come down a little bit. Maybe they'll get back to the low to mid sixes, below six and a half percent. But as of right now, I really just don't see a likely path to rates below 6 % in 2026, even if the deal holds. So given that, given that we're not gonna see relief on mortgage rates, I feel like a broken record.

23:25I know I've been saying this for four straight years, but my track record on this is pretty good, I think. And I just, I wanna be honest with you. I don't wanna be like the people on social media who are saying now rates are gonna come down. It's a perfect time to buy a house. I want you all to know what's actually likely to happen. And this is what I see as the most likely scenario. So what then does this mean for housing? If inflation is going to stay high and mortgage rates are going to stay where they are, what does this mean? We've already had a slow year. Does that mean it's going to slow down more?

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