The effects of recessions on mortgages
Quick insights
- The effects of recessions on mortgages typically include lower mortgage interest rates as the Federal Reserve cuts interest rates to support the economy.
- Recessions can make it harder to qualify for a home loan, as mortgage lenders often tighten credit and income requirements.
- Home prices may slow, stall or decline during a recession. This can create potential opportunities for homebuyers but a level of uncertainty for sellers.
Mortgage rates during a recession are a key concern for both first-time homebuyers and homeowners. So, what happens to mortgage rates during a recession? In manFthere arey cases, mortgage rates decline in a recession because the Federal Reserve typically lowers interest rates to support economic activity. Still, the relationship between the broader economy and borrowing costs isn’t always straightforward. While interest rates may drop, stricter lending standards and financial uncertainty can affect how easy it is to qualify for a mortgage.
What is an economic recession?
Recessions are a natural part of an economy’s cyclical nature. What goes up must come down. Think of an economic recession like a balloon that begins to deflate. A healthy, sustainable economy includes factors like:
- Low unemployment
- Income security
- Retail market growth
- Increases in manufacturing
- Increases in housing starts and homeownership
- Steady or climbing interest rates
Recessions can hit suddenly, or an economy can slowly ease into one. Either way, recessions are marked by several consecutive months of high unemployment. Business earnings may drop as people tend to spend less in uncertain times. You also might find that manufacturing production slows as companies watch spending, which can cause layoffs. Wholesale and retail markets also feel the heat as consumer confidence ebbs. These indicators tend to work together, creating the downturn.
What drives recessions?
Anything that shocks an economy suddenly can drive it into a recession. It can be caused by people or nature. Buying a home can be stressful in the best of times. Making long-term financial decisions like buying a home during a recession can amplify stress—especially if you’re not sure how the homebuying process works.
Who determines the beginning and the end of a recession?
The answer is more of a “what” than a “who.” Certain levels of economic activity generally define a recession, and most are brief, according to the National Bureau of Economic Research (NBER). A recession is a period of time when economic activity declines significantly across the economy for more than several months. Economists look to past indicators to determine when a recession starts by doing a deep dive into where the economy has been. The NBER determines a recession’s end as the date when the economic downturn begins to go up and stays up.
A recession is not the same as a depression, which can last for years. Once a recession passes, economic expansion begins again. Markets rise and consumer confidence picks up. Interest rates that may have fallen at the beginning of a recession may begin to increase as a new expansion period begins.
How recessions affect interest rates and mortgages
When consumers aren’t spending, money doesn’t flow through the economy freely. During a recession, the Federal Reserve may adjust interest rates in hopes of minimizing economic disruption. Sometimes this helps the markets stabilize and consumer confidence rise so that more spending takes place. In any case, lenders use that adjusted interest rate to help set their own rates for loans and mortgages.
The issue is that people often are reluctant to spend and would rather save money during a recession, which means loans aren't in demand. There are many types of mortgages, and all of them have their pros and cons whether in good times or in a recession. Deciding how much risk is too much is both a personal decision and one that your lender can help you determine.
How past recessions affected mortgage rates
Historically, mortgage rates tend to decline during economic downturns as policymakers take action to stimulate the economy. During major events like the 2008 financial crisis and the COVID-19 pandemic recession, the Federal Reserve reduced the federal funds rate, which contributed to lower mortgage interest rates.
The impact of reducing the federal funds rate can make borrowing more affordable for homebuyers and homeowners looking to refinance. However, lower rates don’t always mean easier access to loans; mortgage lenders often increase credit score requirements and scrutinize income stability more closely during uncertain economic periods. You can explore long-term trends in mortgage pricing in this article on historical mortgage rates.
The pros and cons of buying a home during a recession
Recessions may be great times to buy a home. Sellers are motivated, interest rates may be lower and there may be less competition among buyers. The combination of lower interest rates and potentially lower housing prices can bring homes that were out of reach before the recession within reach.
Pro: It's a buyer's market, right?
In real estate lingo, a buyer’s market occurs when there are more houses on the market than there are buyers. Supply exceeds demand, with houses often listed at bargain prices. Other factors contributing to a buyer’s market may include:
- Lower interest rates
- Good supply of comparable homes in the neighborhood
- Lower consumer confidence, meaning less competition
When mortgage interest rates are low and you have a steady income, you may decide that the benefits of homeownership outweigh the risks of buying, even in tough economic conditions. Sellers may be more motivated to negotiate on the price or to make concessions to buyers. There may also be short sales and foreclosures due to the recession, giving you the opportunity to find a bargain.
Keep in mind that if supply and demand drop roughly at the same time, a recession won’t make much difference in home prices. What may make a difference are interest rates.
Cons: The risks of homebuying in a recession
The Great Recession of 2008 left an indelible mark on future real estate markets. During that recession, more homeowners were upside-down with their mortgages, meaning they owed more than their house was worth. With unemployment wreaking havoc and consumer debt high, lenders were forced to assess credit scores more stringently.
The credit score you had before the recession may not be high enough to get a mortgage to buy the home you want during the recession.
Recessions can pose other risks for buyers:
- You may be competing with investors who are buying up properties to rent out.
- Short sales and foreclosures often mean that sellers, which may include banks, may sell properties as they sit, with no repairs or warranties.
- Concessions for things such as repairing a roof or paying closing costs may be less negotiable.
- Economic factors that adversely impact others may impact you, as well.
Ways you can mitigate these and other risks include:
- Increasing your down payment
- Improving your financial picture by paying down debt
- Not opening any new lines of credit and checking your credit report for any discrepancies
Financing a home during a recession may require stronger credit and a substantial down payment so that there’s minimal risk for the lender.
What to do if you can’t make a mortgage payment
If you’re struggling to keep up with your mortgage during a recession, acting early can help protect your finances and your home. Start by contacting your loan servicer to discuss options. They may offer short-term solutions like mortgage forbearance, repayment plans or loan modifications. You can also review your monthly budget to identify areas you can cut back on and prioritize essential expenses such as housing, groceries and utilities.
Housing counselors approved by the U.S. Department of Housing and Urban Development may also be available to provide guidance. In some cases, refinancing or temporarily increasing income through side work may be helpful. A couple of key steps, however, include communicating with your loan servicer proactively and exploring your options. Missing mortgage payments can have negative consequences.
Remember that recessions don't last forever
Getting your financial resources in order may help you move swiftly. The home you want may not be available a few days from now if it’s truly a buyer’s market. Lower interest rates aren’t a given with every recession, but if you find lower-than-average interest rates, it may be tempting to buy now and not wait until a recession is over.
Sooner or later, interest rates will begin to go back up. Here are some signs that the economy is rebounding:
- Mortgage rates on the rise
- Existing home sales level off
- Home prices increase
- Residential investment momentum increases
In summary
As economic conditions shift, many people wonder what happens to interest rates during a recession and how those changes impact home financing. While borrowing costs tend to go down, recessions and mortgage rates are influenced by more than just rate cuts. Lenders’ risk tolerance and overall market stability can vary in a recession and impact the cost to borrow. Lower interest rates can create opportunities, but strong financial positioning and timing remain key when making mortgage decisions.
Homes are a financial investment. It’s important to look at your future goals, not just at the immediate effects of a recession. Talk to a Home Lending Advisor to see what mortgage options, terms and rates might work for your needs.
