Rising Rates Can Impact Demand
After dropping to 5.99% a few weeks ago, mortgage rates have increased to 6.36% amid rising gas prices and the threat of higher inflation.
The economic term “exogenous shock” refers to an unexpected, external, unpredictable event that disrupts a system from the outside. For example, a sudden heat wave hits a kid’s lemonade stand, where demand skyrockets. The kid had nothing to do with the instant change in the weather, yet lemonade sales went through the roof. Or when a hit TV show is filmed in a small town. In the blink of an eye, hotels and vacation rentals are completely booked, and there are no more restaurant reservations available. The sleepy town quickly became a tourist destination when it was unexpectedly featured on TV.
There are many examples of exogenous shocks that have had a major impact on the economy. A prime example is the U.S. COVID-19 lockdown of March 2020, six years ago. It was the largest worldwide pandemic in a century, and it touched almost every corner of the economy for years.
The Iran conflict, which began on February 28, 2026, is the latest exogenous shock to hit the U.S. and global economies. Due to the effective closure of the Strait of Hormuz, gas prices abruptly soared. According to AAA, a gallon of gas in California was $4.64 on February 28th, and today it has soared to $5.53, an increase of $0.89, or 19%. With the rapid change in prices, many are turning to COSTCO for gas, averaging $5.12 per gallon across the state, a substantial savings.
The sudden shift in gas prices has many economists and investors concerned about inflation and, ultimately, the Federal Reserve’s response to the threat to price stability. As a result, according to Mortgage News Daily, mortgage rates have climbed from 5.99% on February 27th to 6.36% today. That means that a $1 million mortgage has increased monthly from $5,989 to $6,229, up $240 per month, or $2,880 per year.
Even with the recent climb in mortgage rates, it is still below last year’s level. It was at 6.8% a year ago, and eclipsed 7% in April and in May. At 6.8%, that $1 million mortgage increases to $6,519, up $290 from today, and at 7%, it would be $6,653, up $424, or $5,088 per year.
The Federal Reserve’s dual mandate is to maintain price stability and promote maximum employment. According to CPI, after rising during the second half of 2025, inflation had been slowly easing. In addition, the labor market was showing further signs of weakening. On March 6th, the February Jobs Report was released, revealing that the U.S. had lost 92,000 jobs. Without the conflict in Iran, mortgage rates would have dropped below their recent 5.99% lows to levels not seen since August 2022.
Housing is about to transition to the Spring Market, the busiest time of the year for buyer activity, which typically peaks between April and May. Where will buyer demand go from here? That largely depends on mortgage rates.
If mortgage rates eclipse 6.5% as prices at the pump continue to climb, expect year-over-year differences in buyer demand and closed sales volume to be nearly the same. However, if the Iran conflict is resolved soon or the Strait of Hormuz reopens, gas prices would drop, easing inflation concerns and putting downward pressure on mortgage rates. The Federal Reserve would likely shift its focus back to the weakening job market and reconsider cutting the Federal Funds Rate. Mortgage rates could fall back to 6%, or even lower if upcoming jobs reports are weak, a substantial year-over-year improvement in affordability. This would likely push buyer demand (a snapshot of the number of new pending sales over the prior month) and closed sales activity higher than levels seen over the past three years.
Los Angeles County demand is currently at 3,754 pending sales, down 56 from last year’s 3,810 level, or 1%. In 2024, it was at 3,647 pending sales (-3%), and in 2023, it was at 3,622 (-4%). The 3-year average buyer demand before the pandemic (2017 to 2019) was 5,461 (+45%).
ATTENTION SELLERS: Rather than betting on the trajectory of mortgage rates, the better strategy is to price with precision and carefully arrive at a home’s Fair Market Value. Carefully consider all recent comparable closed and pending sales. Do NOT overprice. It will only result in wasted market time and less fanfare when the home is properly priced. In a market with plenty of seller competition, pricing is the ultimate strategy.
ATTENTION BUYERS: Even with the recent rise in mortgage rates, they are still lower than last year. With the Spring Market upon us, there will be plenty of buyer competition, and homes that are attractive and expertly priced will fly off the market. Waiting on the sidelines for conditions to improve is often an exercise in futility and in missing plenty of timely opportunities.
