How A Recession Can Affect Mortgage Rates

If you’re looking to purchase or refinance a home, the goal is to pay as little as possible for the loan. It can be difficult to time the market because no one ever knows what’s going on, but it’s fair to say that if there’s an economic downturn, all kinds of tactics are employed to try to stimulate the economy. Therefore, it’s fair to ask, “Do mortgage rates go down in a recession?”

No one has a crystal ball, and we’re not predicting hard times ahead. Rather, this is intended to help you prepare for the mortgage market should a recession come.

What Is A Recession?

A recession is a downturn in economic activity that lasts for at least 3 months. It’s often marked by declines in production and employment. The trouble isn’t in the definition itself, so much as agreeing when it’s happening.

One general rule for determining recessions is that you’re in one when gross domestic product (GDP) – the economic output of a country – has fallen for two consecutive quarters. However, in the United States, the official arbiter is the National Bureau of Economic Research. While it looks at GDP, it also takes into account a variety of other data points.

Of course, the inherent problem with relying on any data is that by the time it’s compiled, the activity underlying the research has already happened. So by the time any determination has been made on being in a recessionary state, the economy has already been there for several months.

As the nation’s central bank, the Federal Reserve (Fed) wields monetary policy, together with fiscal policy controlled by the government, to keep economic growth going for as long as possible and minimize the impact of recessions.

What Happens To Mortgage Rates In A Recession?

At the beginning of the recession, mortgage rates may not move much at all from what they were prior to the recession. It takes a while for the data to come in and people to realize the economy has slowed. Once the realization has occurred, that’s when things could start to move rather quickly.

Once the alarm has been sounded, the Federal Reserve tends to swing into action. The No. 1 control the Fed has is the target range for the federal funds rate. This is the range within which federally insured banks can negotiate with each other to get funds to maintain their operations.

The reason the federal funds rate matters is that the cost of getting funding is passed on from lender to borrower. The more it costs the bank, the more it’s going to cost you, and vice versa. The Fed lowers the target range because cheaper borrowing encourages spending, which gives the economy a boost. They don’t do this lightly because it can also lead to elevated inflation.

When rates are lowered, in theory, borrowing costs across the economy should drop. This holds for mortgage rates. However, with mortgages you’ll see the impact of anticipated actions rather than having them show up after the Fed has made a move because mortgages are generally sold in the bond market a couple of months after the loan closes.

Therefore, to analyze the impact of recessions, we need to look at what happens in the period just before the Fed makes a move. The recession of 2008 actually lasted from December 2007 – June 2009. The Federal Reserve first dropped interest rates in September 2007 to get ahead of what officials saw coming, but Freddie Mac data shows that rates had been falling since roughly July of the prior year.

Rates had been 6.73% at the end of September for a 30-year fixed mortgage. By September 18 when the Fed made its announcement, rates had already fallen to 6.31%. Between September – December the following year, the Federal Reserve lowered rates 10 times, eventually settling in a range of 0% – 0.25%. In December 2008, the rate was in the low-to-mid-5% range for a 30-year mortgage.

It’s worth noting that the federal funds rate isn’t the only thing the Fed changed. They also started buying mortgage-backed securities (MBS) in large quantities. The yields on MBS are used to determine mortgage rates, at least at the market level.

If an investor, or in this case the Fed, is willing to purchase a ton of mortgage bonds, the yield can be lower and still attract a buyer. If appetites change, yields on the bonds have to rise to attract investors and mortgage rates go up.

The combination of Fed purchasing and having the federal funds rate being as low as it was pushed rates to a range between the low 4% and the mid-5% range, where they remained for the better part of a decade.

The recession was much shorter and much deeper in the early stages of the pandemic, but the Fed followed a lot of the same tactics to support the economy in the housing market in particular. The pandemic recession lasted from February – April 2020. That January, the average interest rate was 3.72% to begin the month. By April, rates had fallen as low as 3.31%, but they fell as low as 2.65% in January 2021.

Because no one ever knows for sure they’re in a recession when they’re in it, the market reaction to a recession tends to last far beyond the event itself. So mortgage rates will be lower in the aftermath of the recession, but not necessarily during one.

Of course, this is only half the equation for determining mortgage rates. The other half always involves personal factors like your credit history and the size of your down payment or equity amount.

What Happens To House Prices In A Recession?

The graph above takes a look at the Case-Shiller Home Price Index. You’ll notice right away that home prices tend to go up over time. This makes sense because land is a scarce resource and regulations within communities only allow for some much building upon it. If maintained, stick-built homes tend to appreciate in value.

However, it’s not always the case. The biggest example of this would have been in 2008. During one time frame between April 2008 and March 2009, prices fell about 19.55%. There were some other circumstances happening at the time because housing was overbuilt based on looser credit standards. But even if we look at a recession in the early 1990s, prices level off a bit and fall slightly for a while.

You’ll see other recessions where nothing appears to change in terms of the direction of the house prices. Sellers aren’t likely to budge on desired price unless they have to. And that would only happen if the property has been on the market long enough to notice that not as many buyers are out there, so it really depends on the length and depth of the recession.

Should I Get A Mortgage During A Recession?

There are advantages and disadvantages to getting a mortgage during a recession.

Pros

• House prices could drop: If sellers are having a hard time getting people to make an offer at their price point because of economic conditions, prices could drop. This likely wouldn’t happen right away, but it could happen over time as the reality of the current market sets in.
• Less competition: Recessions have a variety of far-reaching effects. People may lose jobs or choose to tighten the purse strings in anticipation of turbulent times ahead. If that happens, you could be facing less competition for the house you want.
• Motivated sellers: For the reasons mentioned above, many sellers would choose to take their house off the market and wait for a time that’s more economically suitable, but this means that the homes that stay on the market have to sell. You may find that you have more negotiating power.

Cons

• Limited inventory: If enough sellers pull their homes off the market, you may have a hard time finding the home that would best suit you and your search may last longer.
• Stricter lending requirements: In a recession, some lenders may tighten up the requirements on the basis that with the economy being bad, they need to be extra careful that you can make the payment for some time in the event of a layoff or other unanticipated financial strain.

What To Do If Mortgage Rates Drop During A Recession

The following tips will serve you well in any market, but they can be particularly helpful if you’re applying them during an economic downturn.

Get Your Credit Ready

One of the most important things you can do is to make sure your credit is in good shape. While this is true any time you try to get a mortgage, it’s especially important when there is a recession because lenders will be going over things with the fine-tooth comb, and possibly even tightening up the usual guidelines to mitigate increased risk based on the economic conditions.

The good news here is that your focus isn’t any different from what it normally would be in this situation. You want to maintain a low credit card utilization of no more than 30% relative to your own limits. Make your payments by their due date and don’t apply for any credit you don’t need while trying to get approved for a mortgage.

Find A Lender

You always want to shop around and find someone who’s going to give you a good balance between the rate and the services they offer. Pay attention to not only your base interest rate but also the annual percentage rate, which includes closing costs and other fees. The greater the difference between the two, the more you’re being charged for the loan itself.

You can also ask other questions like whether there are charges to make payments via certain methods, if the lender has a prepayment penalty if you pay off early and if they’ll be handling the servicing after your loan closes.

Work With A Real Estate Agent

On average, people buy houses maybe once a decade. Given that, it’s always helpful to work with a professional who understands the market inside and out. But when there’s a recession, agents are going to really help you because they’ll understand how the market has changed and what a fair price is.

Get Approved

Once you settle on a lender, you will want to make sure to get the people looking so you can get approved and know exactly how much you can afford. If you’re looking to refi, this will give you an idea of whether you’ll be able to secure the funding to accomplish your goals.

If you’re looking to purchase, sellers and their real estate agents will want certainty you have the funds to back up what you’re offering given the recession. Because we do a credit check and verify your income and assets with documentation including things like W-2s, 1099s and account statements, your Verified Approval from Rocket Mortgage® can provide that for them.¹

The Bottom Line: Mortgage Rates Could Fall In A Recession

Mortgage rates have tended to fall in response to recent recessions. Lowering borrowing rates is one of the tools used by the Fed to kickstart the economy. House prices are a little more mixed. It depends on the length of the recession because sellers are slower to change, especially if they know their neighbor recently received a higher value.

No matter the environment you’re looking to purchase in, it’s a good idea to get your credit ready and get approved so you have a solid idea on the budget. If you’re ready, you can start an application.

¹ Participation in the Verified Approval program is based on an underwriter’s comprehensive analysis of your credit, income, employment status, assets and debt. If new information materially changes the underwriting decision resulting in a denial of your credit request, if the loan fails to close for a reason outside of Rocket Mortgage’s control, including, but not limited to satisfactory insurance, appraisal and title report/search, or if you no longer want to proceed with the loan, your participation in the program will be discontinued. If your eligibility in the program does not change and your mortgage loan does not close due to a Rocket Mortgage error, you will receive the $1,000. This offer does not apply to new purchase loans submitted to Rocket Mortgage through a mortgage broker. Rocket Mortgage reserves the right to cancel this offer at any time. Acceptance of this offer constitutes the acceptance of these terms and conditions, which are subject to change at the sole discretion of Rocket Mortgage. Additional conditions or exclusions may apply.