One Bright Spot If a Recession Hits? It Might Be Mortgage Rates

When recessions hit, the financial picture can seem grim, but there might be a silver lining: Mortgage rates tend to fall. This happens because a slower economy pushes the Federal Reserve to lower interest rates to stimulate borrowing and investment. While you may expect a similar trend if the U.S. faces a recession in the near term (although a rate decline is not guaranteed), mortgage rates may not go as low as they have in recent years.

How Mortgage Rates Change in Response to a Recession

When the economy is weaker, loan demand usually goes down as people, being uncertain about the future, tend to borrow less, said Aaron Gordon, senior mortgage loan officer at Guild Mortgage. Because of this, the Federal Reserve intervenes by lowering interest rates to stimulate the economy. 

Historically, mortgage rates have fallen during or immediately after recessions. For example, during the Great Recession of 2008, 30-year fixed mortgage rates dropped from over 6% to below 5%. More recently, during the COVID-induced recession of 2020, mortgage rates fell to record lows, dipping below 3%.

This is also tied to U.S. Treasury bonds. “When recession fears rise, investors pull money out of the stock market and move it into safer assets like Treasury bonds,” said Nicole Rueth, founder of The Rueth Team Mortgage and market trends committee member with Denver Metro Association of Realtors. “That demand drives down bond yields, and since mortgage rates closely follow the 10-year Treasury, those rates tend to drop alongside the yields.”

Opportunities for Homeowners

For existing homeowners, a recession can be an ideal time to refinance, especially if they hold mortgages with higher rates. Refinancing essentially means replacing your existing mortgage with a new one, such as one with a lower interest rate, which can be easier to do during a recession when interest rates tend to be lower.

Recession and Mortgage Rate Patterns

While interest rates typically drop during recessions, this may not always be the case. Even when interest rates decline, not every recession guarantees a dramatic drop. 

Factors like higher inflation and other economic challenges can influence how much the rates fall, if at all. “The lowest rates in history were spawned by two of the biggest economic calamities that are not likely to happen this time, so I wouldn’t expect mortgage rates in the 2s, 3s, or 4s,” Gordon said. 

Consider keeping an eye on how home prices change. Recessions can cool the housing market, leading to slower appreciation or even falling home values. This could limit equity and refinancing options. In extreme cases, if home values drop significantly, some borrowers may find themselves underwater, owing more than their home is worth.

The Bottom Line

Mortgage rates typically fall during the recession, which can open up opportunities for homebuyers to buy and for homeowners to lock in lower interest rates. However, it’s important to consider other factors, like the condition of the housing market and broader economic challenges, during an unstable economic environment. Exercise caution and, ideally, speak to a financial advisor to find options that best suit your needs.