How Recessions Impact Mortgage Rates and Home Values 

Introduction 

Many worry that a recession will tank the housing market like the 2008 crash did. It’s an understandable concern – the memory of falling home prices and foreclosures is still fresh for many of us. But here’s the thing: history shows that a recession doesn’t automatically mean a housing crash. Today’s economic fundamentals are entirely different from those leading up to 2008, making a repeat of that crisis unlikely. Let’s break down what typically happens to mortgage rates and home values during recessions, and why a downturn might create opportunities for homebuyers. 

Recession Trends and Mortgage Rates 

When recessions hit, interest rates in the broader economy tend to decrease, and mortgage rates usually follow suit. It’s pretty simple: the Federal Reserve often lowers benchmark rates to stimulate the economy during tough times. Lower federal funds rates mean cheaper borrowing costs across the board, including for home loans. 

Looking back, mortgage rates have fallen in every U.S. recession in modern times. Over the past five recessions, 30-year mortgage rates dropped by roughly 1.8 percentage points on average from the highest to lowest points. In some cases, the decline was even more dramatic – during the early 1980s recessions, mortgage rates fell by about 4–5% from their pre-recession highs. We saw this pattern again in the early 2000s and in 2008 when mortgage rates pulled back significantly as the economy weakened. 

The takeaway? Recessions often bring relief for borrowers through lower interest rates, making mortgages more affordable for homebuyers and creating refinancing opportunities. 

Home Values During Recessions 

Contrary to what many believe, home prices don’t automatically plummet when a recession hits. Housing values have remained resilient through most economic downturns. Looking at the last six U.S. recessions, home prices appreciated in four of them and saw only mild dips in one other, before the unique case of 2008. In the majority of economic downturns (1980, 1981, 2001, and 2020), home prices stayed flat or even rose. 

The Great Recession of 2008 was the major exception when U.S. home values dropped by nearly 20% nationally. But there’s a good reason 2008 was different: the housing crash was triggered by factors specific to the real estate market at the time – namely, incredibly lax lending standards and an oversupply of homes. 

Before 2008, it was way too easy to get a mortgage with little or no money down, and builders had flooded the market with new construction. This speculative frenzy created a glut of unsold homes, causing prices to collapse when demand dried up. Outside of that unique bubble, housing downturns have been mild. Even the early 1990s recession saw home values dip by only a couple of percentage points before bouncing back. 

The key point? A typical recession does not equal a major drop in home prices. More often, prices stay stable or continue climbing modestly through economic slumps. 

Current Market Stability 

Why aren’t analysts forecasting another 2008? Today’s market fundamentals are much stronger. Lending standards have tightened significantly since the subprime era – you won’t find “no income, no down payment” loans anymore. Buyers now must qualify for mortgages with solid proof of income and decent credit, meaning new homeowners are far less leveraged than they were back then. 

Americans have been building up equity in their homes for years. As of 2023, nearly 40% of U.S. homeowners own their homes free and clear (no mortgage at all), and among those with mortgages, a large portion have substantial equity. Almost 46% of mortgaged homes are considered “equity-rich,” meaning the owners owe less than half of the home’s value on their loan. Only a tiny fraction of homeowners are underwater on their mortgages today. 

This healthy equity cushion makes widespread distress sales or foreclosures during a downturn much less likely since owners aren’t stuck with homes worth less than what they owe. 

Additionally, housing supply is constrained in most markets right now, which helps support home values. Overbuilding isn’t an issue today – quite the opposite. After the 2008 bust, home construction lagged behind population growth for years. Now we have housing shortages in many areas, not an oversupply. This tight inventory means that even if demand cools a bit in a recession, there isn’t a flood of excess homes on the market that would drive prices down. 

Thanks to stricter lending practices, high homeowner equity, and low inventory, the housing market entering any potential recession is on very solid footing. These factors should prevent the kind of free-fall in prices that occurred in the late 2000s. 

 

Why Now Could Be a Good Time to Buy 

If you’re able to buy a home, a recessionary period can be a smart time to purchase. Here’s why: 

Mortgage rates are expected to fall during a recession, but they haven’t dropped dramatically yet. That means buyers who act now can lock in a home purchase before an onslaught of demand returns. When rates eventually tick down, many sidelined buyers will likely jump back into the market, increasing competition. 

Right now, with rates still a bit elevated, fewer people are competing for homes – and that lighter competition can be a huge benefit. You’ll likely face fewer bidding wars and have more room to negotiate on price or contingencies when there aren’t as many other offers on the table. 

Another thing to consider: home values today aren’t expected to crash; if anything, they’re projected to keep rising (albeit more slowly) in most areas even if a recession hits. Waiting for prices to fall substantially could backfire, because, in the absence of a housing bubble, prices may stabilize or inch up. 

If you buy now, you secure the property at today’s price, before any further appreciation. Then, if mortgage rates do drop in the next year or two, you can refinance your loan to take advantage of the lower rate. As the saying goes, you can “marry the house, date the rate.” In other words, buy the home you love now (marry it), and plan to refinance the mortgage (date it) when better rates come along. 

By purchasing during a calmer market, you avoid the frenzy that could occur once borrowing becomes cheaper. When everyone else starts rushing back in, you’ll already be a homeowner sitting on any equity gains, rather than a buyer facing fiercer competition and higher prices. 

Taking Action 

Bottom line: a recession doesn’t need to scare you away from buying a home. The data shows that mortgage rates typically fall in recessions and home values tend to hold steady or rise, especially given today’s much stronger market conditions. 

If you’ve been on the fence about purchasing, now might be a smart time to start exploring your options. By buying now, you can take advantage of the current low competition and get into your new home before the crowd returns. Later on, should interest rates drop, you’ll be in an ideal position to refinance and lower your monthly payment. 

Don’t let recession fears keep you from achieving your homeownership goals. Every situation is different, so consider talking with a trusted real estate agent or mortgage advisor about your specific circumstances. But if you’re financially ready, the prudent move may be to purchase a home now and refinance the loan when rates decline. 

Take the first step by reaching out to a real estate professional – you might find that this “quiet” moment in the housing market is the perfect opportunity to make your move. Your future self (enjoying a new home and a refinanced mortgage) will thank you!