What are the current predictions for a recession in the U.S. economy? How might a recession affect mortgage rates this time around? What unique factors could influence the outcome of a potential recession? How have mortgage rates historically reacted during recessions in the past? What does Clement Bohr say about the impact of a potential recession on the housing market?
There’s been a lot of talk lately about the possibility of a recession. In April, JPMorgan Research increased the probability of a recession in 2025 to 60%, up from the earlier prediction of 40%. Torsten Sløk, a partner and chief economist at Apollo Global Management, an alternative asset manager and owner of Yahoo Inc., puts the odds of a recession this year at 90%. Sounds bleak, right? Yet, a recession may be just the kind of economic setback that pushes mortgage rates down.
Clement Bohr, economist with the UCLA Anderson Forecast, recently issued a Recession Watch analysis. "Every economist out there right now is saying just this tariff policy alone could trigger a recession in the U.S.," Bohr told Yahoo Finance in a phone interview. However, he added that forecasting a recession is difficult because policy-making decisions by the Trump administration vary day-to-day.
"Usually rates come down in a recession," Bohr said. "But it’s not always the case, or at least if we look at what’s going to happen this time around, it’s not necessarily going to be the case." Bohr said mortgage rates usually come down in a recession because, as the stock market becomes more volatile, investors shift their portfolios into government bonds. This pushes the prices of the bonds up — and yields (interest rates) fall.
What may be different this time? "The shock that’s going to trigger this recession is also a shock that’s going to boost inflation, at least over the short term," Bohr added. If the trade war with China causes supply chain interruptions, Bohr said the risk of inflation might put the Federal Reserve in a position to not lower rates any further.
With the counterpressures of possible inflation and potential recession, mortgage rates may not move much. "I would be surprised if interest rates go much higher because we have seen now that the administration is sensitive to that," Bohr said. There’s also a chance that the nation experiences a mild or very brief recession, which would likely not impact interest rates. That’s the thing about recessions — you don’t know you’re in one until it’s already underway — or nearly over. The National Bureau of Economic Research declares a recession after "a few months" of data indicating a declining economy.
There have been seven recessions over the past 50 years. In all of those economic downturns, 30-year mortgage rates eventually dropped. Sometimes, well after a recession. In the more than yearlong recession lasting from late 1973 to early 1975, rates fell, then rose, then dropped again. In the much shorter, five-month recession of 1980, mortgage rates skyrocketed from 12.85% to over 16% before dropping to nearly 12% as the recession ended. However, between the end of June 1980 and the beginning of the next recession one year later, rates crept up to 17% and even higher before dropping again.
In the most recent recession, which lasted barely three months in the early pandemic year of 2020, mortgage interest rates barely budged, hovering near the mid-3% range. Yet, as the pandemic lingered, rates eventually fell to 2.65% before climbing to where they are today. Bohr said that existing home sales have been "stuck" for so long, with homeowners sitting on very low-rate mortgages, that they may be sitting in houses that just don’t fit their lifestyles anymore.
"At some point, say even just a 1% decline in the mortgage rate — which would be quite something — may be enough to trigger a lot of them to finally relocate into something that fits them better,” Bohr said. “And they’ll just eat the extra couple percentage-point margin in the new mortgage." With his outlook of mortgage rates not moving substantially higher or lower, it’s a nugget of hope for prospective home buyers. "Even a slight decline in mortgage rates could boost the housing market quite substantially," he said.
They generally do, but as you can see from the chart above, most mortgage rate movements — up or down — happen outside the very narrow time frames of recessions. If you have a fixed-rate mortgage, your payment will remain the same unless changes occur with taxes, insurance, or any other escrow accounts that may be a part of your monthly payment. With an adjustable-rate mortgage, if you are beyond the introductory rate period, your payment may reset with the movement of interest rates at its next periodic rate adjustment.
Most analysts aren’t expecting any drastic drops in home loan rates within the next year. Of course, that can change with a dramatic shock to the U.S. economy. It’s not likely. However, few, if any, people can forecast an unexpected economic setback. The pandemic was the most recent example — and the 2008 housing market crash another.
Do Mortgage Rates Go Down in a Recession?
The relationship between mortgage rates and economic conditions is complex and often raises questions, particularly during periods of recession. Many homebuyers and homeowners are left wondering: do mortgage rates typically decrease during a recession? The answer is not straightforward, as it encompasses various economic factors, Federal Reserve policies, and market responses.
Understanding Mortgage Rates
Mortgage rates represent the interest charged on a home loan and can significantly impact a buyer’s ability to purchase a home. They are influenced by several factors, including the overall economy, inflation rates, and monetary policy. Generally, lower rates make borrowing cheaper, stimulating economic activity.
The Economic Cycle and Mortgage Rates
To understand the behavior of mortgage rates during a recession, one must first grasp the economic cycle. A recession is characterized by a slowdown in economic activities, such as declining GDP, increased unemployment, and reduced consumer spending. Typically, during a recession, demand for homes may decrease. Fewer people are willing or able to purchase homes, which often creates downward pressure on housing prices.
Historical Trends
Historically, mortgage rates tend to decline during economic downturns. For example, during the Great Recession of 2008, mortgage rates plummeted as the Federal Reserve implemented measures to stimulate the economy. The Fed lowered the federal funds rate, which indirectly led to lower mortgage rates. This pattern suggests that in times of economic hardship, the overarching strategy employed by the Federal Reserve is to lower interest rates to encourage borrowing and spending.
The Role of the Federal Reserve
One of the primary mechanisms through which the Federal Reserve impacts mortgage rates is by adjusting the federal funds rate. This key rate dictates how much banks charge each other for overnight loans and influences broader interest rates, including those for mortgages. When the economy enters a recession, the Fed often slashes rates to stimulate growth. Lower federal funds rates mean lower borrowing costs for banks, which can lead them to offer lower mortgage rates to consumers.
For instance, following the financial crisis in 2008, the Fed’s actions led to a decrease in mortgage rates, making home buying more accessible amid economic uncertainty. This tactic can spur home sales, helping to stabilize the housing market during tough economic times.
Supply and Demand Dynamics
Another factor that influences mortgage rates in a recession is supply and demand. When economic conditions worsen, the demand for housing typically decreases as potential buyers face job loss or uncertainty about their financial futures. However, the supply of homes may remain relatively stable or even increase, as homeowners choose to sell their properties, leading to price reductions.
With diminished demand, mortgage lenders may lower interest rates to entice buyers, helping to spur activity in a sluggish market. Nonetheless, this is not a guaranteed outcome; factors such as credit risk can influence lenders’ decisions to adjust rates.
Inflation and Economic Conditions
Inflation also plays a crucial role in determining mortgage rates. During a recession, inflation often decreases due to reduced consumer spending and economic activity. Lower inflation can lead the Fed to lower interest rates further, encouraging borrowing. Conversely, if inflation were to rise during a recession (a situation termed "stagflation"), it might complicate the relationship, causing mortgage rates to remain high despite economic downturns.
Current Trends and Outlook
As of late 2023, economic indicators show signs of potential recessionary pressures, including high inflation and increasing interest rates by the Federal Reserve. While there is speculation that the Fed may soon pivot to a more accommodative stance, thus bringing rates down, mortgage rates have remained elevated due to broader geopolitical and economic factors.
The housing market has shown resilience, but affordability is increasingly a concern for potential buyers faced with high rates. Should a recession materialize, it is plausible that rates may decline again, as seen in past downturns. However, prospective buyers should remain vigilant and monitor economic signals and Federal Reserve announcements.
Conclusion
In summary, while mortgage rates often decline during recessions due to a combination of reduced demand, lower inflation, and aggressive monetary policy by the Federal Reserve, there are no guarantees. The relationship is influenced by a myriad of factors, including market conditions and lending practices. For prospective homebuyers, understanding these dynamics can help in making informed decisions during uncertain economic times. As always, staying informed about economic indicators and consulting with financial professionals can provide valuable insights as one navigates the complexities of mortgage rates in a recessionary environment.
Mortgage rates can often decrease during a recession. This is typically due to several factors:
Economic Slowdown: As the economy slows, the Federal Reserve may lower interest rates to stimulate growth. Lower rates can lead to decreased mortgage rates.
Decreased Demand: During a recession, fewer people may be looking to buy homes due to economic uncertainty, which can further drive down rates.
- Investor Behavior: In uncertain economic times, investors often seek safer assets, driving down yields on government bonds. Mortgage rates are often tied to these bond yields, so as they fall, mortgage rates may decrease as well.
However, it’s important to note that mortgage rates are influenced by various factors, including inflation, lender competition, and market conditions, so they don’t always move in lockstep with economic indicators.