What Happens to Mortgage Rates in a Recession?

Any economic recession talk is scary to the government, investors, and the general public. That could mean ruining businesses and depriving households of their incomes and savings as the economy shrinks. But what is a recession, and how does it impact the housing market?

A recession is a period in which there is a temporary economic decline orchestrated by negative or fragile growth in real GDP and significantly rising unemployment rates. During this period, industrial and economic activities are reduced. Several factors lead to a recession, including;

  • Declining Consumer Confidence: If market consumers believe the economic performance in the country is on the decline, they will be unwilling to spend money. Despite being psychological, there is a tangible impact on the economy.
  • Lowering Real Wages: When the wages are adjusted for inflation, the worker’s purchasing power is tremendously reduced.
  • High-Interest Rates: If the rates are high, the money available in the economy for investments is reduced. As such, high-interest rates limit liquidity which is essential for propelling economic growth.
  • Inflation: It is the rise in service and commodity prices to a point when a unit of currency buys fewer services or goods than it previously did. In simple terms, it is the decline in the purchasing value of money. High inflation is always seen as a precursor to an inevitable recession as the market players act to correct it.

Why is a Recession a Crisis?

The description above clearly tells much about a recession and why it could be a crisis for the economy. Recessions are usually prolonged, meaning people will experience a period of low economic output, which means businesses could be closing down. With that, the entire national production for the country lowers, leading to low revenue and increased borrowing by the government.

Again, a recession lowers consumer demand for products as most people will be unable or unwilling to buy goods or services for various reasons. Such reasons may include declining purchasing power of money, cutting working hours and wages, and loss of job. Besides, if there are expenses that must be covered and the money isn’t enough, consumers could find themselves burdened with debts they cannot pay.

Example of Recessions in History

Over the years, there have been great recessions in different countries, with some having a global impact. When a big economy like the United States experiences a recession, the global economy could inevitably shrink. Here are some notable recessions that have earned a part in history books.

  1. The Own Goal Recession

It lasted for thirteen months, from May 1937 to June 1938. The GDP declined by 10% while unemployment peaked at 20%.

  1. The V-Day Recession

It lasted for eight months, from February 1945 to October 1945. The GDP shrunk by 10.9%, and unemployment reached 3.8%.

  1. The Post-War Brakes Tap Recession

It lasted eleven months, and the GDP declined by 1.7%, while the unemployment rate hit 7.9%.

  1. The Investment Bust Recession

It began in August 1957 and lasted for eight months until April 1958. During this period, the peak unemployment rate reached 7.4% while GDP declined by 3.7%.

  1. The Oil Embargo Recession

The economic turmoil lasted sixteen months, from November 1973 to March 1975. During this period, the USA experience a peak unemployment rate of 8.6% and a GDP decline of 3%.

  1. The Great Recession

It is one of the most recessions experienced in the United States, having happened in December 2007 and lasting until June 2009. This eighteen months recession saw American GDP decline by 4.3%, and unemployment levels hit 9.5%.

How Does Mortgage Rate Behave During Recessions?

Any serious person aspiring to own a home, especially through a loan, is keen on what happens to mortgage rates during a recession. Well, that’s because it is one of the things standing between you from owning a home or losing your savings and investments. This correlation between mortgage rates and recession is thus an essential factor for consideration during house buying. Here is what happens to mortgage rates during a recession.

When there is a recession, a country’s economic activity declines, leading to increased unemployment and declining purchase power of money. As such, the number of people seeking to buy a house or home is declining. With the number of people wishing to buy houses declining, mortgage financing experiences low demand. That will essentially lead to a fall in the interest rates.

Again, that is also explainable in terms of the monetary policy by the central bank. However, in the case of the United States, the Federal Reserve. A low rate of loan demand among potential home buyers forces the Federal Reserve to ease the monetary policy. The loosening, easing, or expansionary monetary policy means the Federal Reserve lowers rates and releases more money into the economy to propel growth. When rates are lower, borrowers increase due to the lenient and affordable conditions of accessing a loan or a mortgage.

Therefore, it is notable that a recession will impact the mortgage rates driving them lower first due to the demand and supply in the market. Secondly, the interventionist approach by the Federal Reserve will also determine whether the mortgage rates will keep going down. So, when potential buyers ask, ‘if mortgage rates go up in a recession? The response is no, but the rates decrease. As such, it would be most appropriate to buy a house during a recession – it gives you a better deal!

Why Are Housing Interests Going Up?

In a recession, people have several concerns, including the direction of interest rates and if their loan refinancing during a recession will be possible. ‘Do interest rates go up in a recession?’ is something most homebuyers want to know. The percent at which they rise and the effects on payments in critical in their decision making. At the start of the third quarter of 2022, the 30-year fixed rate mortgage was up by one point to 7.253%. It’s no secret that housing interest rates have been on the rise and here is why;

  • Federal monetary policy,
  • The current state of the housing and bond market,
  • Slowed economic growth, and
  • High inflation.

2023 Recession Prediction

The economic conditions encountered in 2022 have become a point of reflection when looking at the 2023 recession prediction. As we move into 2023, here are what experts in the economy are predicting on recession. Some of the indicators that a recession is imminent in 2023 include the following;

  • The current high inflation rate towards the end of 2022. Most people increasingly believe the only way to correct inflation is through ways that lead to a recession.
  • There is an increasing loss of jobs, hence the rising unemployment rate.
  • The worsening global trade also means external markets are reducing, and firms are forced to lay down workers.
  • The rising cost of production that most companies can’t sustain leads to closure.
  • The rising global insecurity and security concerns, especially in the case of the Russian war on Ukraine.

Are Mortgage Rates Going Down Again?

Well, from the look of things, will mortgage rates keep going down? The market and government’s interventions to curb inflation will potentially lead to slowed economic growth in 2023, especially in the first and second quarters. In that case, the mortgage rates will likely go down during this period. However, the lowering of the mortgage rates will be modest.

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