2 in 3 economists forecast a recession in 2023, but did you know mortgage rates historically decline in recessions? Why is this?
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Mortgage Rates and Recessions: Understanding the Connection
Recessions are a normal part of the economic cycle, characterized by a period of declining economic activity, rising unemployment, and decreasing consumer confidence. During these times, mortgage rates also tend to decrease, providing home buyers and owners relief. In this article, we will explore why mortgage rates decline during recessions and what impact this has on the economy.
The Federal Reserve’s Role in Mortgage Rates
The Federal Reserve, also known as the “central bank,” plays a significant role in determining mortgage rates. The Federal Reserve sets interest rates to help control inflation and maintain economic stability. When the economy slows down, the Federal Reserve will lower interest rates to encourage borrowing and spending, which can help stimulate economic growth. As a result, mortgage rates also tend to decrease during recessions.
Supply and Demand
Another factor that affects mortgage rates during recessions is the supply and demand of money. During a recession, people tend to save more and spend less, reducing the demand for loans. At the same time, banks have more funds available because fewer people are borrowing, causing a surplus of money. To encourage borrowing, banks lower their interest rates, and this, in turn, leads to lower mortgage rates.
Impact on Homeowners and Homebuyers
Lower mortgage rates during recessions have a positive impact on homeowners and homebuyers. For homeowners, decreasing mortgage rates means they can refinance their mortgage and lower their monthly payments. For homebuyers, lower mortgage rates make it more affordable to buy a home, which can help increase demand for housing and stimulate economic growth.
Conclusion
In conclusion, mortgage rates and recessions are closely linked, with mortgage rates tending to decrease during recessions. This is due to the actions of the Federal Reserve and changes in supply and demand for money. The decline in mortgage rates during recessions provides relief to homeowners and homebuyers, making it more affordable to purchase or refinance a home. This can help stimulate economic growth, making it an essential factor to consider during economic downturns. Let’s connect. Wes Estes.