When the economy struggles, a recession can happen. This can be caused by many different factors, including high inflation, elevated interest rates, and financial crises. Many Americans feel the pinch during a recession, including those shopping for a home and seeking financing via a mortgage loan.
That raises several questions: Do interest rates go up or down in a recession? Specifically, what happens to mortgage rates during a recession? For that matter, when do mortgage rates go down, and is it hard to get a mortgage during a recession? Trust in this article to better explain what a recession is, the impact on interest rates during recessions, the benefits and drawbacks of purchasing a home in a recession, and more.
What is a recession?
A recession is a period of significant economic decline that lasts at least two consecutive quarters – six months or longer. These two consecutive quarters are marked by negative gross domestic product (GDP) growth.
“Recessions are characterized by rising unemployment, weakening consumer confidence and spending, and reduced industrial output,” explains Albert Lord, founder/CEO of Lexerd Capital Management. “Key drivers for recessions are high inflation, elevated interest rates, supply chain disruptions, and financial emergencies.”
Over the past 50 years, the United States has experienced seven recessions, per the National Bureau of Economic Research (NBER). The 1973-1975 recession lasted 16 months, followed by a 6-month downturn in 1980 and a 16-month recession from 1981 to 1982. A brief 8-month recession occurred between 1990 and 1991, then an 8-month decline in 2001. The Great Recession, from 2007 to 2009 – which was triggered by the collapse of the housing and credit markets – stretched for 18 months. The most recent recession during the COVID-19 pandemic in 2020, driven mostly by an abrupt global economic shutdown, lasted just 2 months — the shortest on record.
Recessions matter when making financial plans because they determine interest rates, asset values, job security, and the availability of credit. For house hunters and homeowners alike, a current or impending recession can help determine whether to buy a home, sell a home, or stay put. Being aware of where the country is in a recession cycle can help homebuyers in particular make smarter decisions.
What happens to mortgage rates during a recession?
Although it may not occur immediately, mortgage rates usually drop lower during recessions. That’s because the Federal Reserve will typically cut interest rates – specifically the benchmark federal funds rate – to encourage borrowing and spending during a recession and improve employment and economic growth. Although mortgage rates don’t rise or fall in unison with that benchmark rate, they are strongly impacted by the Fed’s policy choices. During times of economic uncertainty, investors tend to move their dollars into safer U.S. Treasury bonds, which causes their prices to rise and yields to decrease. Exactly when do mortgage rates go down? Mortgage interest rates most closely follow the 10-year Treasury yield; if those yields drop, mortgage rates will likely drop, too.
“Lower credit demand, higher investor appetite for safe assets like U.S. Treasuries, and lower inflation expectations all contribute to mortgage rates decreasing,” notes Dennis Shirshikov, a professor of economics and finance for City University of New York/Queens College.
The average decline in mortgage rates during a typical recession is usually well below 1%. According to historical data provided by the Federal Reserve Bank of St. Louis, here’s what mortgage rates did during the past six recessions:
| Recession | Mortgage Rate at Start | Mortgage Rate at End | Change |
|---|---|---|---|
| 1980 | 12.88% | 12.19% | -0.69% |
| 1981–1982 | 16.83% | 13.82% | -3.01% |
| 1990–1991 | ~10.00% | 9.50% | -0.50% |
| 2001 | 6.95% | 6.66% | -0.29% |
| 2007–2009 | 6.10% | 5.42% | -0.68% |
| Feb–Apr 2020 | 3.45% | 3.23% | -0.22% |
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Should you buy a home in a recession? Pros and cons
As you can see, rates tend to drop lower for borrowers during recessions, although not significantly. But rates aren’t the only factor that should be considered. Let’s drill down into the pluses and minuses of purchasing a home when a recession is underway.
Pros
Cheaper interest rates. Borrowing usually becomes less expensive, increasing long-term affordability.
Lower prices. Sellers could be extra motivated to unload their properties, leading to lower home prices, more negotiating power for buyers, and better deals overall. “Sellers may be more willing to provide some concessions, such as paying for closing costs or including their appliances or furniture,” says Shirshikov.
Less competition. “There tend to be fewer buyers during a recession, which means more negotiating power for those who are prepared,” suggests Oliver Burgelman, a real estate broker with Vanguard properties in San Francisco.
Good appreciation potential. “I had several buyers purchase the recession of 2009. While it wasn’t an easy decision for them, by the end of that year the recession was over, and in a few years these buyers had made stunning gains,” Burgelman continues. “Home appreciations of $400,000 or more were not out of the question.”
Cons
Tighter lending standards. Mortgage loans may actually be harder to obtain during a recession if lenders decide to make it tougher to qualify. “Lenders typically ramp up scrutiny during these times, demanding higher credit scores, lower debt-to-income ratios, and a lot more documentation,” continues Shirshikov.
Financial risks. There are a lot of “what-ifs” to worry about during a recession, including the risk of losing your job and making less money.
Potential for property value decline. The value of homes can drop during and after a recession, especially a long one. That home you buy could be worth less in the months and years after the recession.
Worse property conditions. During a slump, there may be more distressed properties listed or sold “as-is,” with fewer repairs or warranties, putting the onus on buyers to carefully inspect and update these homes.
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How to take advantage of lower mortgage rates in a recession
As a prospective buyer, it’s  best to be well prepared during or just prior to a recession. To capitalize on lower mortgage rates and position yourself for good buying opportunities in this window of time, follow these tips suggested by the experts:
Check and improve your credit. Learn what your credit score is and review your three free credit reports. Aim for a credit score of at least 620; a higher score can yield lower interest rates and better loan offers. You can raise your score relatively quickly by making bill payments on time, paying down credit card balances, requesting a credit limit increase on your credit card, correcting any errors or inaccuracies you spot on your credit reports, and not closing any older accounts while also not opening any new credit accounts.
Shop around among several different lenders. Compare rates, terms, and fine print carefully and crunch the numbers to get the best deal.
Get pre-approved for a mortgage loan and gather all important documents so that you can act quickly. You’ll typically need to provide proof of identity, income, employment, assets, debts, and any relevant legal or financial documents.
Collaborate with a trusted Realtor. “Work with an agent who knows how to find off-market opportunities and negotiate favorable terms,” Burgelman advises.
Lock in a low interest rate. It’s impossible to perfectly time rates, but pull the trigger quickly if you are confident rates won’t go any lower.
Up your down payment. Make as large a down payment as you can afford to get an even better loan deal.
Search for bargains. “Tour homes that have been sitting long on the market, as these sellers may be more amenable to creative deals,” recommends Shirshikov.
What not to do during a recession
“Don’ts” can be just as important as “do’s” when trying to finance and claim a home in recessionary times. Follow these best practices:
Avoid adjustable-rate mortgages (ARM) unless rates are anticipated to remain low for a long time. “Typically, ARMs adjust in three or five years, after which time the rate may be much higher,” cautions Lord.
Don’t overcommit yourself. Ensure that you can afford the monthly mortgage payments, and gauge how long you plan to remain in the home. “You don’t want to stretch your budget based on future income assumptions,” Burgelman notes.
Steer clear of using emergency or borrowed funds for your down payment. Make sure you have a comfortable financial cushion in place after the down payment is made.
Don’t postpone your purchasing decision too long. “Be careful not to assume that home prices will always continue to fall – markets can recover unpredictably and quickly,” Lord adds.
Resist taking on short-term debt unless you can afford to quickly pay the money back.
Be cautious with loan co-signers. “Having a co-signer could strain your relationship with that person during financially uncertain times,” says Burgelman. Also, both of you will be on the hook to repay the mortgage if recessionary financial stress affects either or both households.
Conclusion
Waiting for mortgage rates to go down? A recession is an extended period of economic regression that, while worrisome financially, could present a good opportunity to purchase a home if mortgage rates drop – which is likely – and you are financially ready and enjoy good job security. Weigh the positives and negatives carefully before committing to a home purchase during a recession, and position yourself to take advantage of lower prices and rates by improving your creditworthiness, finding the right lender, and getting preapproved for a mortgage.
However, be careful about trying to perfectly time your purchase during what could be a limited window of opportunity.
“Attempting to time mortgage rates is generally risky because rates – and home prices – are influenced by many unpredictable factors,” says Lord. “While recessions can lead to lower rates, there’s no guarantee you’ll save the most money, as home prices depend on supply and demand quickly. Instead, focus on financial readiness and long-term goals. If you have a sufficient down payment, optimal debt-to-income ratio, and cash reserves, expect predictable monthly payments, and find a house that meets your needs, it’s better to purchase sooner rather than wait.”
Whether or not a recession is on the horizon, trust in Better to help you find the right loan at an attractive rate.
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