Do mortgage rates go down in a recession?

Updated Sep 05 2024

Historically, mortgage rates drop when there is a recession in the United States. The Federal Reserve uses monetary policies to steer interest rates during a recession. These policies have an indirect impact on mortgage rates.

A recession often comes with reduced economic activity and higher unemployment rates. This means that there is less demand for mortgage financing. And with less demand, there is a great possibility that mortgage rates will have fluctuations.

In this article, Mortgage Professional America will discuss what happens to mortgage rates during a recession. Do these rates rise and fall, or do they just continue to go down? We will also highlight the advantages and disadvantages of taking out a mortgage during a recession.

To our usual pool of readers in the mortgage industry, this is another one of our client education pieces. If you have clients who are interested in learning about recessions and how they affect mortgage rates, be sure to share this with them!

What is a recession?

A recession is a period of economic decline. The technical definition of a recession is at least two consecutive quarters of negative economic growth, as measured by gross domestic product (GDP). During a recession, economic production and output slow down and unemployment increases.

It is more common for the broad term of a recession to be used than the technical definition. For instance, the National Bureau of Economic Research (NBER) uses the term recession as a significant economic decline that lasts more than a few months.

Companies usually lay off workers to preserve profit margins during recessions. The workers who have been laid off often spend less on discretionary purchases, such as buying new cars or travelling.

When the economy is booming, it has periods of expansion. However, the expansion period always peaks and a period of contraction—called a recession—follows. As such, recessions are a part of a country’s economic cycle.

What causes a recession?

Recessions are not caused by any one single factor and can be triggered by various circumstances. Because of this, there is no reliable way to predict precisely when a recession will begin. Still, there are common causes which include:

• geopolitical events that increase stock market volatility
• high interest rates
• low confidence in the markets and the economy
• market bubbles
• natural disasters that deliver large scale economic shock
• sharp declines in consumption and demand
• global pandemics like COVID-19

Understand what causes an economic recession when you watch this clip below:

Duration of recessions

The duration of any given recession depends on the factors leading up to it. For instance, the Great Recession of 2008 was triggered largely by the subprime mortgage market crisis. It led to a housing market crash and in 2007, the Great Recession began and lasted for about 18 months.

Will mortgage rates go down during a recession

Mortgage rates are more likely to drop in the early stages of a recession. When the economy starts to pick up, the Federal Reserve has the option to adjust its interest rate policy. They can raise rates to curb borrowing and spending as the economy begins approaching the peak of a period of growth.

During recessions, the Federal Reserve can also steer interest rates using the same monetary policy. When a recession begins, the Federal Reserve might reduce the federal funds rate to push for the economy’s recovery.

What is the federal funds rate?

The federal funds rate is the percentage at which financial institutions lend money to each other overnight. With this, mortgage lenders and banks usually adjust interest rates for loans when the federal funds rate drops. This means that loans and lines of credit become less costly for borrowers.

This strategy is based on the idea that if credit is more accessible, more people will borrow. As consumers spend the borrowed money, the funds get funneled back into the economy. This helps in pulling it out of a recession.

However, there is a downside to this approach. While it can be a boon for consumers, lenders and banks can also cut back on the interest they pay to savers as rates drop. This means that borrowers can expect lower rates during a recession for deposit accounts such as savings accounts.

Do mortgage rates go down in a recession? Watch this video to learn more about what happens to mortgage rates during an economic downturn:

If you need help understanding what happens to mortgage rates during a recession, get in touch with an expert in the mortgage industry. You can choose one from the mortgage professionals that we highlight in our Best in Mortgage section.

How do you navigate mortgage rates in a recession?

When mortgage rates go down in a recession, it is important to remember that they are fluid. Mortgage rates at the beginning of a recession are not necessarily an indication of where they will be at the end. They can still fluctuate depending on various factors.

There are strategies that you can adopt to manage the changing rate environment in a recession. You might want to:

1. change banks
2. consider refinancing
3. consolidate debts

Let us take a closer look at each strategy to see if they will help you navigate interest rates in a recession.

1. Change banks

If a recession is on the horizon, switching banks may be a good move. This is especially true if you have money in:

• savings accounts
• certificates of deposit (CDs)
• other deposit accounts

Switching to an online bank might help you get a higher interest rate and annual percentage yield (APY) on savings balances. This is because online banks have lower overhead costs than more traditional banks. They also pass on those savings to their customers.

2. Consider refinancing

Changes to the federal funds rate do not directly affect mortgage rate movements. Mortgage rates are more closely linked to the Treasury yield curve. If mortgage rates drop in a recession, it may be an ideal time to get a better deal on your mortgage. Case in point: in August 2024, refinancing applications soared following a drop in mortgage rates.

Before refinancing, consider what you will pay in closing costs. You might also consider how long it will take you to break even to recoup any savings at a lower rate.

Another possibility for saving money would be if you have student loans. You can refinance them with a new loan at a lower interest rate.

3. Consolidate debts

A recession may be an ideal time to consider consolidating high-interest debts with a low-interest personal loan. If you qualify, you might also want to try a 0% balance transfer credit card offer.

While changing banks, considering refinancing, and consolidating debts are good ways to navigate mortgage rates in a recession, there are other ways to secure your overall financial well-being. Check out this recession-proof financial strategy:

Is a recession good or bad for home buyers in the US?

It might be good for prospective buyers since mortgage rates go down in a recession. On the contrary, it is bad news for sellers.

When mortgage rates are on the rise, the cost of financing a home also moves upward. This is true even when property prices are on the decline. Less demand and fewer home buyers mean that less people are competing for the same inventory of properties.

When that competition evaporates, home sellers lose the upper hand they enjoyed during a seller’s market. In that case, sellers often have to settle for less than their initial asking price. At the very least, they may have to ask for less than they may have gotten in a more competitive market.

Advantages and disadvantages of buying a house during a recession

Should you buy your dream home when the economy is in a decline? The answer to this lies in weighing the pros and cons. Here are some pros and cons of buying a house during a recession:

Advantages of buying a house during a recession

• Less competition: Recessions usually put people in a tough position when it comes to their finances. This makes it more difficult for them to afford a home. Luckily for prospective home buyers, this often results in less competition within the housing market for those that can afford to buy.
• Better prices: With fewer prospective home buyers, sellers are less likely to see multiple offers or bidding wars for their homes. As with less competition, this can lower prices on properties, making it a major bonus for buyers.
• Better rates: The Federal Reserve lowers interest rates during a recession to help the economy bounce back. This often results in more favorable mortgage rates for borrowers who want to get home loans.

Disadvantages of buying a house during a recession

• Strict lending requirements: Banks and other mortgage lenders often impose stricter lending requirements on home loans during a recession. They do this to protect their business since it decreases the chances of borrowers defaulting on their mortgages.
• Fewer options: With lower prices and less competition, some home sellers will take their property off the housing market or decide to wait it out. This decision leaves less available inventory for prospective home buyers to choose from.
• Economic uncertainty: During a recession, companies lay off their employees and many people lose their source of income. During a period of economic uncertainty, liquidity is critical. This means that having your money tied up in real estate might not be the best move.

Impact of recession on mortgage rates

Understanding how current mortgage rates are affected by recession is an important step to being able to mitigate its negative impact.  A recession might be part of the economic cycle, but it can still have lasting effects. As such, it is best to learn when the right time is to make a big purchase such as buying property.

Would you consider getting a home loan when mortgage rates go down in a recession? Why or why not? Let us know in the comments below