Here's What Happens to Mortgage Rates During a Recession

After months of warnings about a 2023 recession, as of now, it seems likely that we'll avoid a broad economic downturn this calendar year. But that isn't to say a recession won't strike in the future.

Recessions are a part of the economic cycle. And while they're not always drastic and lengthy, they do tend to happen from time to time. So there's a good chance that at some point in your life, you'll end up having to grapple with a recession. 

If it comes to be that you need a mortgage at that time, you should know that mortgage rates tend to fall when recessions hit. But that doesn't necessarily mean you should purposely try to buy a home when economic conditions aren't great. 

Why a recession could lead to lower mortgage rates

There are different ways you can define a recession, but the gist of it is a general slowdown in economic activity. Because of that, there tends to be less demand for mortgages when economic conditions aren't stellar. And mortgage lenders tend to respond to that by lowering their rates in an effort to drum up business.

In early 2009, for example, when the U.S. was deep in the throes of the Great Recession, mortgage rates fell to around 5% for the 30-year loan. A year earlier, they averaged around 6%. 

Similarly, in 2020 and 2021, economic activity slowed due to the COVID-19 pandemic. Back then, mortgage rates fell to around 3%, representing the lowest rates borrowers had seen in years. 

This isn't to say that mortgage rates are guaranteed to drop when a recession hits. But there's a good chance they will as economic activity generally slows down and fewer home purchases occur.

Should you sign a mortgage during a recession?

It can be tempting to sign a mortgage when borrowing rates are favorable. And that might happen during a recession.

However, you should know that signing a mortgage during a recession can be a risky move, especially if the recession is more extreme in nature. That's because job loss tends to be more common during economic slumps. And so if you sign a mortgage and then lose your job a few months later, you might be stuck with large monthly payments at a time when it's difficult to find a new job and replace your missing paycheck.

On the other hand, it's also possible for there to be a recession that doesn't affect your income. In fact, there are certain industries that are generally said to be recession-proof. And if you work in one of them, you may be in a better position to take on the expense of a mortgage at a time when economic conditions aren't so favorable.

If you're a doctor, for example, you may have some added job security since your services are apt to always be in demand. Similarly, there's a perpetual need for educators. If you're a teacher, your job might be safe even if economic conditions deteriorate. So you'll need to think about your specific job situation when deciding whether it's a good idea to sign a mortgage during a recession or not.

Your savings should play a role in that decision as well. If you know that you'll have enough money in the bank to cover a good three to six months of essential living expenses after making a down payment on a home, then you're in a pretty strong position to sign a mortgage, even if the economy isn't doing so great. But if your down payment will pretty much wipe out your savings, then signing a mortgage is risky (during a recession or otherwise).

All told, a recession could lead to lower mortgage rates. Whether that's something you're able to jump on, however, will depend on your personal circumstances.