The U.S. housing market’s tentative recovery was jolted by escalating geopolitical tensions in late February 2026, as conflict with Iran triggered a swift and significant rise in mortgage rates, reshaping outlooks for the critical spring selling season.
Mortgage Rates Spike Amid Geopolitical Uncertainty
In the days preceding the conflict, the average rate on a 30-year fixed mortgage had been holding steady at 5.99%, according to data from Mortgage News Daily. As uncertainty gripped global markets, that rate climbed rapidly, hovering around 6.5% within a week. This sharp increase directly counteracted recent positive trends, including moderating home price gains and a slowly expanding inventory, which had begun to favor buyers after years of a fiercely competitive market.
The immediate reaction from potential buyers was a pullback. Data from the Mortgage Bankers Association showed that mortgage applications for home purchases fell by 5% in the week following the rate surge. However, the impact extends beyond financing costs, weaving into broader concerns about inflation and economic stability.
Zillow Revises 2026 Home Sales Forecast
Prior to the conflict, real estate platform Zillow had projected a modest 4.3% year-over-year increase in existing-home sales for 2026, characterizing the year as a potential “reset” after a prolonged downturn. “While that of course would not be a strong market, it would represent a market that had turned a corner,” wrote Mischa Fisher, Zillow’s chief economist, in a March 24 report.
Fisher’s analysis now incorporates new variables: elevated energy prices and renewed inflation fears, which pressure consumer spending and could nudge unemployment higher. His modeling illustrates how the duration and severity of the rate increase dictate the annual outcome. If rates returned to pre-conflict levels by the end of April, sales could still grow by 3.48% for the year. A delay until July 1 reduces that gain to 2.33%, and until September 1, to just 1.21%. In a more severe scenario—where rates remain 50 basis points higher and unemployment rises by 20 basis points for the rest of the year—Zillow forecasts a slight annual decline of 0.73%.
Builders Feel the Pressure as Orders Slow
The new construction sector is already responding to the shifted landscape. KB Home, a major U.S. homebuilder, lowered its full-year delivery forecast after reporting disappointing first-quarter earnings. “Consumers have been faced with a variety of challenges over the past two years, and the conflict in the Middle East that began at the end of February has added another layer of uncertainty,” stated Jeff Mezger, KB Home’s Chairman. The company cited net orders below the level required to meet prior guidance as the primary reason for the revision.
Inventory levels are a key part of the story. Builders currently hold a very high supply of completed homes. On the existing-home side, total inventory is also rising, though this increase is concentrated in the South and West regions, with the Northeast and Midwest seeing less pronounced growth.
Buyer Cancellations Surge, Shifting Leverage
Even before the rate spike, buyer hesitancy was measurable. According to a count by Redfin, the rate of canceled home purchase contracts hit its highest level since 2017 in February 2026. Approximately 13.7% of homes that went under contract that month were canceled, up from 12.8% a year earlier. This trend accelerates as financing costs rise, eroding buyer purchasing power and deal viability.
The result is a pronounced, near-record imbalance in market leverage. Redfin estimates there are now over 600,000 more homes for sale than there are active buyers—a gap that varies by region but signifies a decisive shift toward buyers. “As the housing
