Do Mortgage Rates Go Down During an Economic Recession?

Do mortgage rates go down during an economic recession? The short answer is, it's complicated, but often, yes, they do. While there's no guarantee, history shows that in recent decades, mortgage rates often decrease during and after a recession. This is largely due to the Federal Reserve's actions to stimulate the economy, but it's important to remember that every recession is different, and factors like inflation play a huge role. Let’s dive into why this happens, looking at past recessions and what it all means for you.

As someone who's followed the housing market and economy for a long time, I know how confusing it can be. Figuring out if now's a good time to buy a home is a big decision, and understanding how recessions affect mortgage rates is a key piece of that puzzle. I'm going to break down the historical data and the factors that drive these changes in a way that's easy to understand.

Let's find out whether mortgage rates typically drop during economic recessions by examining historical data from major U.S. recessions since 1970, drawing from sources like Freddie Mac’s Primary Mortgage Market Survey and other economic analyses.

Do Mortgage Rates Go Down During an Economic Recession?

Historical Analysis of Mortgage Rates During U.S. Recessions

To understand the relationship between mortgage rates and recessions, let’s examine the behavior of 30-year fixed mortgage rates during each major U.S. recession since 1970, based on data from Freddie Mac and other reputable sources.

Recession Period	Average Mortgage Rate Range	Trend During Recession	Key Influences
1973-1975 (Nov 1973 – Mar 1975)	8-9%	Stable or increasing	High inflation, oil crisis
1980 (Jan 1980 – Jul 1980)	13-14%	Increasing	Stagflation, Federal Reserve rate hikes
1981-1982 (Jul 1981 – Nov 1982)	16-18% (peaked at 18.63% in Oct 1981)	Peaked, then began to decline	High inflation, Federal Reserve actions
1990-1991 (Jul 1990 – Mar 1991)	~10% to ~9%	Decreasing	Stabilizing inflation, economic recovery
2001 (Mar 2001 – Nov 2001)	~8% to ~6.5%	Decreasing	Federal Reserve rate cuts, dot-com bubble burst
2007-2009 Great Recession (Dec 2007 – Jun 2009)	~6.73% to ~5%	Decreasing	Federal Reserve quantitative easing, housing market crash
2020 COVID-19 (Feb 2020 – Apr 2020)	~3-4% to <3%	Decreasing	Federal Reserve emergency measures, low pre-recession rates

1973-1975 Recession

• Period: November 1973 – March 1975
• Mortgage Rates: Rates started in the mid-7% range in the early 1970s and rose to around 9.19% by 1974, continuing to climb to 11.2% by 1979 (Atlantic Bay).
• Trend: Rates did not drop during this recession. The period was marked by high inflation due to the 1973 oil crisis, which drove up borrowing costs as lenders adjusted rates to keep pace with rising prices.
• Key Influences: The Organization of the Petroleum Exporting Countries (OPEC) oil embargo led to hyperinflation, prompting the Federal Reserve to maintain or increase interest rates to combat rising prices.

1980 Recession

• Period: January 1980 – July 1980
• Mortgage Rates: Rates averaged around 13.74% in 1980, reflecting the high inflationary environment of the late 1970s.
• Trend: Rates continued to rise during this short recession, part of a broader trend that saw rates peak in 1981. The Federal Reserve’s efforts to curb stagflation (high inflation and low growth) kept borrowing costs elevated.
• Key Influences: Stagflation and the Federal Reserve’s aggressive rate hikes to control inflation were primary drivers, making borrowing expensive.

1981-1982 Recession

• Period: July 1981 – November 1982
• Mortgage Rates: Rates reached an all-time high of 18.63% in October 1981, the highest recorded by Freddie Mac (Debexpert). They began to decline slightly toward the end of the recession but remained in the double digits.
• Trend: Rates peaked during the early part of the recession and started to decline as the Federal Reserve’s policies began to tame inflation. However, they remained high throughout the recession period.
• Key Influences: The Federal Reserve, under Paul Volcker, raised interest rates to combat inflation, which had risen to 9.5% by 1981. This led to unprecedented borrowing costs, but the subsequent decline in inflation allowed rates to start falling by late 1982.

1990-1991 Recession

• Period: July 1990 – March 1991
• Mortgage Rates: Rates were around 10.13% at the start of 1990 and began to decrease, reaching around 9% during the recession and continuing to fall to 6.94% by 1998.
• Trend: Rates showed a downward trend during this recession, reflecting stabilizing inflation and economic recovery efforts. The 1990s saw a general decline in rates as the economy benefited from low unemployment and solid growth.
• Key Influences: The stabilization of inflation and the Federal Reserve’s less aggressive monetary policy compared to the 1980s contributed to the decline in rates.

2001 Recession

• Period: March 2001 – November 2001
• Mortgage Rates: Rates started at around 8% in early 2001 and dropped to approximately 6.5% by November 2001, according to Freddie Mac data (FRED).
• Trend: This recession saw a clear decrease in mortgage rates, driven by Federal Reserve rate cuts in response to the dot-com bubble burst and economic slowdown.
• Key Influences: The Federal Reserve lowered short-term interest rates to stimulate the economy, and the shift of investor focus to fixed-income investments like bonds further reduced mortgage rates.

2007-2009 Great Recession

• Period: December 2007 – June 2009
• Mortgage Rates: Rates were around 6.73% in late 2007 and fell to the low-to-mid-5% range by December 2008, reaching 5.4% by 2009.
• Trend: Rates decreased significantly during this recession, starting even before the official recession period as markets anticipated economic trouble. The decline continued post-recession due to sustained Federal Reserve interventions.
• Key Influences: The Federal Reserve implemented quantitative easing, buying mortgage bonds to drive down interest rates, and the housing market crash reduced loan demand, further lowering rates.

2020 COVID-19 Recession

• Period: February 2020 – April 2020
• Mortgage Rates: Rates were already low, averaging 3.72% in January 2020, and fell to 3.31% by April 2020, dropping to a record low of 2.65% in January 2021.
• Trend: This brief recession saw mortgage rates decrease sharply, continuing a downward trend that led to historic lows in 2021.
• Key Influences: The Federal Reserve’s emergency measures, including cutting the federal funds rate to near zero, and low pre-recession rates due to a stable economy, drove rates down.

Why Do Mortgage Rates Behave This Way?

Several factors influence mortgage rate movements during recessions:

• Federal Reserve Policy: The Federal Reserve plays a pivotal role by adjusting short-term interest rates. During recessions, the Fed often lowers the federal funds rate to encourage borrowing and spending, which indirectly affects long-term mortgage rates. This was evident in the 2001, 2007-2009, and 2020 recessions, where aggressive rate cuts and quantitative easing led to lower mortgage rates (Investopedia).
• Inflation: High inflation, as seen in the 1970s and early 1980s, pushes mortgage rates upward as lenders demand higher returns to offset rising prices. Conversely, low inflation or deflationary pressures during recessions can lead to lower rates, as observed in the 1990s and 2000s.
• Economic Demand: Recessions typically reduce demand for mortgages due to job losses and economic uncertainty. Lower demand can lead lenders to offer competitive rates to attract borrowers, contributing to rate declines.
• Bond Market Dynamics: Mortgage rates are closely tied to the yield on 10-year Treasury bonds. During economic uncertainty, investors often seek safe-haven assets like bonds, increasing bond prices and lowering yields, which pulls mortgage rates down.

Do Mortgage Rates Always Drop During Recessions?

Historical data indicates that mortgage rates do not always drop during recessions. In the 1973-1975 and 1980 recessions, rates were either stable or increasing due to high inflation and economic instability. The 1981-1982 recession saw rates peak at historic highs before beginning to decline. However, in more recent recessions (1990-1991, 2001, 2007-2009, and 2020), rates consistently decreased, often starting before or during the recession and continuing afterward.

This shift reflects changes in Federal Reserve policy over time. Since the 1990s, the Fed has been more proactive in cutting interest rates and implementing measures like quantitative easing to combat recessions, directly impacting mortgage rates. Additionally, lower inflation in recent decades has reduced upward pressure on rates, unlike the high-inflation environment of the 1970s and early 1980s.

Implications for Homebuyers

For homebuyers, a recession can present opportunities if mortgage rates drop, as lower rates reduce borrowing costs and increase affordability. For example, during the 2007-2009 Great Recession, rates fell to the 5% range, making homeownership more accessible for some. Similarly, the record-low rates in 2020-2021 spurred a surge in homebuying and refinancing (LendingTree).

However, recessions also bring economic challenges, such as job losses and reduced consumer confidence, which can make homebuying riskier. Home prices may also decline during recessions due to lower demand, as noted in projections for a potential 2025 recession. Homebuyers should weigh these factors and consult financial advisors to assess their personal circumstances.

In Conclusion

So, to circle back to our original question: Do mortgage rates go down during an economic recession? While it's not a sure thing, historical evidence suggests that they often do, especially in more recent times. This is largely due to the Fed's response to economic downturns, but factors like inflation can also play a role.

Ultimately, the decision of whether or not to buy a home during a recession is a personal one. It depends on your financial situation, your risk tolerance, and your long-term goals. By understanding the factors that influence mortgage rates, you can make a more informed decision.