The U.S.-Iran conflict has disrupted Wall Street, leading to broad increases in mortgage, auto loan, and credit card borrowing costs, thereby raising daily living expenses for American consumers.
According to data from Freddie Mac, mortgage rates have climbed for five consecutive weeks following the outbreak of conflict, with the average rate for a 30-year fixed mortgage retreating slightly this week to 6.37%.
Just weeks ago, borrowing costs were significantly lower. In late February, two days before the U.S. and Israel launched a joint strike against Iran, the average rate for a 30-year fixed mortgage fell to 5.98%, dipping below 6% for the first time in over three years.
Different types of consumer loans are tied to different benchmarks. For instance, some loans are linked to U.S. Treasury yields, which have risen due to investor concerns about inflation.
Other borrowing products are connected to the benchmark interest rate set by the Federal Reserve. The Fed has recently held rates steady, and this policy stance is likely to persist if rising energy costs reignite inflation.
Mortgage rates typically follow the yield on the 10-year U.S. Treasury note. Over the past month, this yield has risen steadily, driven by surging oil prices, inflation fears, and expectations of increased government war-related spending. Yields rise when bond prices fall.
The 10-year Treasury yield has climbed from below 4% at the end of February to a peak of 4.48% in March, hovering around 4.3% this week. This yield is one of the most critical rates for the economy, significantly influencing mortgage rates, various borrowing costs for Americans, and financing expenses for businesses and the U.S. government.
Jeffrey Roach, Chief Economist at LPL Financial, stated, "Investors are coming to terms with the possibility of a prolonged U.S.-Iran conflict and its economic implications. The longer global oil supplies remain constrained, the greater the potential for intensified inflationary pressures."
Here is a detailed look at how the conflict is increasing borrowing costs for Americans:
Mortgage Rates Even with this week's slight decline in mortgage rates, individuals securing a loan now will pay tens of thousands of dollars more over the life of the loan compared to those who locked in rates just weeks ago.
For a $500,000 home with a 20% down payment, a buyer who locked in a 30-year fixed mortgage at February's average rate of 5.98% would pay approximately $28,700 annually in principal and interest. At this week's average rate of 6.37%, the same loan would cost $29,931 per year. While the difference may seem small annually, over the 30-year term, the current buyer would pay over $36,000 more than the February buyer.
Larry White, Professor of Economics at New York University's Stern School of Business, said, "Borrowers certainly aren't happy. This adds a significant amount to their monthly mortgage payments."
However, despite recent increases, current mortgage rates remain below the level of a year ago, when the average 30-year fixed mortgage rate was 6.62%.
Auto Loans Rising Treasury yields also affect other borrowing costs, such as auto loans. Five-year auto loan rates are typically tied to shorter-term bond yields.
In March, yields on two-year and five-year U.S. Treasuries surged significantly, reaching their highest levels since August 2023.
Data from Bankrate shows that the average rate for a five-year auto loan has remained largely unchanged during the conflict period. However, after rising consistently in recent years, persistently high bond yields will keep auto loan rates elevated.
Stephen Kates, Financial Analyst at Bankrate, stated, "Auto loan rates are likely to plateau." He added, "For borrowing rates, including the notably increased mortgage rates, the most significant factor is the duration of the conflict. How long it lasts and the uncertainty it creates will outweigh all other influences on rates."
Bankrate data indicates the average rate for a five-year auto loan is around 7%. For a borrower with a $30,000, five-year loan at 7%, the monthly payment would be approximately $594.
This higher expense coincides with Americans facing dual pressures from rising gasoline prices and high vehicle costs.
Derek Stimel, Associate Professor of Economics at the University of California, Davis, said via email, "The cost of financing an auto loan will remain high for longer, making it even more difficult to afford new cars, which are already at historically high price levels."
Credit Cards Many interest rates in the economy, such as those for credit cards, are typically linked to the Federal Reserve's benchmark rate. Credit card rates also include a spread that is usually substantial.
Credit card rates surged significantly between 2022 and 2023, and the current average annual percentage rate remains above 19%.
Despite the Federal Reserve implementing several rate cuts in 2024 and 2025, credit card rates have stayed high. While the U.S.-Iran conflict has not directly pushed these rates higher, it makes any near-term reduction highly unlikely.
Traders have scaled back expectations for Fed rate cuts this year, and markets now anticipate the central bank will hold rates steady in the coming months.
Stimel noted, "If the Fed maintains the current rate without cutting, credit card rates will stay high. This puts more pressure on people's daily spending, like groceries. When these expenses are put on credit cards, the repayment burden becomes heavier."
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