Do mortgage rates go down in a recession?

Do mortgage rates go down in a recession? Historically, mortgage rates usually fall during recessionary periods.

One factor to consider is that the Federal Reserve uses monetary policy to steer interest rates during a recession. And indirectly, these policies usually impact mortgage rates.

Another factor is that recessions often come with reduced economic activity and higher employment rates. This means that there is less demand for mortgage financing. And with less demand, interest rates decrease.

But what is the definition of a recession? Do mortgage rates rise or fall during a recession? And what are the pros and cons of taking out a mortgage during a recession? In this article, we will answer these questions and more.

Here are all the answers to the question: do mortgage rates go down in a recession?

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).

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

During a recession, economic production and output slow down and unemployment usually increases.

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

Recessions are a part of the economic cycle, which, when the economy is booming, also has periods of expansion.

Invariably, however, the expansion period peaks and a period of contraction—called a recession—follows.

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. There are, however, common causes. These include:

• Global pandemics like COVID-19
• 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

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

Do interest rates go up or down in a recession?

Interest rates are more likely to drop in the early stages of a recession. As the economy starts to pick up, the Federal Reserve can adjust its interest rate policy.

After the economy starts approaching the peak of a period of growth, the Federal Reserve can raise rates to curb borrowing and spending.

The Federal Reserve steers interest rates during recessions using monetary policy. When a recession begins, the Federal Reserve might reduce the federal funds rate—the rate at which banks lend money to each other overnight—to kick-start economic growth. 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, helping to pull it out of a recession.

There is, however, 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, during a recession, you may see lower rates for deposit accounts such as savings accounts, for instance.

How do you navigate interest rates in a recession?

When navigating interest rates in a recession, it is important to remember that they are fluid. Rates at the beginning of a recession are not necessarily an indication of where rates will be at the end of the recession.

However, there are strategies that you can adopt to manage a changing rate environment in a recession, including:

• Change banks
• Consider refinancing
• Consolidate debts

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

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), or money accounts.

For instance, switching to an online bank might help you get a higher interest rate and annual percentage yield (APY) on savings balances. Why? Typically, online banks have lower overhead costs than more traditional banks—and pass on those savings to their customers.

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

Consolidate debts

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

Another possibility for saving money would be if you have student loans; refinancing them to a new loan with a lower interest rate.

While changing banks, considering refinancing, and/or consolidating debts are good ways to navigate interest rates in a recession, there are other strategies.

For instance, you can think about how a recession may affect your portfolio. If the market is increasingly volatile, it could negatively affect the value of your stock allocation. Bonds are usually a safer bet. However, during a recession, fluctuating interest rates can impact the maturities are the best investments.

Is a recession good or bad for home buyers?

When interest rates are on the rise, the cost of financing a home usually increases as well. This is true even if home prices themselves 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. It is usually bad news for sellers. However, it can be great news for prospective buyers.

Often, recessions can push home buyers out of the housing market. This does not mean that it is necessarily a bad time to buy—if you can afford it. Let’s look at the pros and cons of buying a home during a recession:

Pros

• Less competition: Recessions usually put people in a tough position financially, making it more difficult for them to afford property. 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 usually lowers interest rates during a recession as a way to stimulate the economy. This often results in more favorable interest rates for borrowers who want to get home loans.

Cons

• Strict lending requirements: Banks and lenders often impose stricter lending requirements on mortgages during a recession to protect their business. Stricter lending requirements also decrease the chances of a borrower being unable to pay back the home loan.
   
• Fewer options: With lower prices, as well as 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 an economic recession, many people usually lose their jobs. There are also other conditions that can cause people’s finances to be unstable and unpredictable. During a period of economic instability, liquidity can be important. It also means that having your money tied up in real estate might not be the best move.

Understanding how current mortgage rates are impacted by a recession is an important step to navigating the process. Next, it is best to understand when the best time is to purchase a property. For instance: what are the pros and cons of purchasing a property during a recession?

Remember: the more knowledge you have, the better off you will be.  

If you need help understanding what happens to mortgage rates during a recession, get in touch with one of the mortgage professionals we highlight in our Best of Mortgage section. Here you will find the top performing mortgage professionals, including mortgage loan officers, across the USA. 

Have experience negotiating your mortgage rate during a recession? Let us know in the comment section below.