Mortgage rates in a recession, what happens to them ?

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Fears of a recession are back, and for some, it’s been accompanied by worries about higher mortgage rates. This time around, however, it’s unclear how prices will react. If we are indeed in or heading for a recession, are steeper mortgage rates a safe bet?

What is a recession?

A quick definition of a recession is just two consecutive quarters of declines in gross domestic product (GDP). We saw this in the first half of 2022.

But is this really a recession? The National Bureau of Economic Research formally defines when a recession begins and ends. Declaring a recession isn’t easy, in part because the second-quarter test is just one of many factors to consider:

Inflation remains high. Annual inflation hit 9.1% in June, the highest level in more than 40 years. The Fed has taken a series of rate hikes on banks to dampen demand, but so far that has not quelled price gains.
Instead of losing jobs, the labor market continues to expand. The July jobs report beat expectations, the private sector fully recovered from the damage caused by the pandemic, and the unemployment rate was as low as 3.5%.
Existing home sales fell, but prices rose. The median price of an existing home topped $400,000 in May, reaching $408,400, according to the National Association of Realtors. That figure continued to rise to $416,000 in June. Sales have now fallen for five straight months.

How past recessions have affected mortgage rates

Whether or not a recession is confirmed, mortgage rates are on a wild ride this year. Here’s what we’ve learned from past cycles:

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If we look back at mortgage rates, we can see that 30-year bonds have typically fallen during recessions since the 1980s. While the monetary policy set by the Federal Reserve affects a variety of financial products, fixed-rate mortgage rates are tied to the yield on the 10-year Treasury note, a measure that is not immune to broader economic forces.

Also, since recessions are associated with lower economic activity and higher unemployment, there will be less demand for mortgages. When demand falls, interest rates fall.

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Today, our economic growth is slowing, while employment levels are high. We’ve also seen a strange shift in mortgage rates over the past 18 months:

A year later, 30-year-olds will start 2022 at 3.4 percent. It then rose rapidly to 4% by mid-February, and then to 5% in April.
The proportion of 30-year-olds was just under 6% (5.91%) in June, but dropped back to around 5 in July. It has stabilized at 5.55% since the first week of August.

Many predict that the 30-year fixed rate will stay in the mid-5% range or slightly higher for the rest of the year. The truth, however, is that the push and pull of Fed rate hikes on the one hand and inflation on the other make it unclear whether the current recession will lead to significant increases or decreases in future rates.

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What happens to your mortgage during a recession?

Fixed-rate mortgages are considered an inflation hedge because they allow borrowers to ensure monthly repayments no matter how high mortgage rates rise. If you can keep making those payments during a recession, you’ll be in a safer position than borrowers with variable-rate mortgages (ARMs) that fluctuate with the market.

On the other hand, a recession could affect your mortgage servicer’s business. Fortunately, borrowers have safeguards if the business fails. You will be notified that your loan has been sold to another lender or service provider, where you can direct your payments.

What to do when you can’t pay your mortgage

If you are experiencing financial hardship due to a recession or other emergency, contact your mortgage administrator as soon as possible for remedies such as deferment or loan modification.

When you find yourself in a situation that you can quickly correct, indulgence is your way out. With this payback program, your provider allows you to miss some payments now and then add them to future monthly payments or one-time charges. Alternatively, you can agree on a short-term interest payment schedule and the deficit will be covered later.

If your situation is permanent, request a mortgage modification to change loan terms, such as B. interest rate or repayment schedule.

For these and other options, please contact your service provider immediately to see if you qualify. Don’t stop payments without communicating with your service provider – if you do, you’ll hurt your credit score and potentially initiate a foreclosure process.

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