July ’22 Market Watch

July, 2022

Recession And Mortgage Rates – A Historical Perspective

There is growing concerning by the business and consumer sectors that a recession is likely. Those concerns were confirmed when the Federal Reserve increased interest rates in their attempt to bring down inflation. Their hike of .75 percent points put the Fed funds rate upwards to 1.75 percent. Mortgage rates responded in kind, and as of July 14 stood at around 5.5 percent for a 30 year conventional mortgage.

The Federal Reserve will likely raise their rate during their July meeting. Some analysts suggest up to another .75 percentage points. During June, inflation jumped again on a persistent climb in gas, food and rent costs, notching another 40 year high. Prices increased 9.1 percent from a year earlier, up from an annual rate of 8.6 percent the prior month and the largest gain since November 1981. If the Fed does raise rates in an attempt to curb inflation, as anticipated, the likelihood of the economy slowing further increases, and into a recessionary period.

Now for a historical look. Throughout history, during the early stages of a high inflationary period, the Federal Reserve raises rates and continues to do so thru the beginning of a recession trying to tame inflation and engineer the “soft landing”, as they are hoping to do now. If they miss that target, the economy heads to a recession, which according to analysts, is highly likely.

The Federal Reserve raising rates will most likely force an increase in mortgage rates. Where to? Probably somewhere just over the 6 percent range further slowing home purchases and price appreciation. That will be very bad for the economy because of the tremendous impact the real estate market has on economy, not just in home sales but also subsequent purchases such as furniture, décor etc.

So, historically what happened when the economy finds itself in a recessionary period? Once recognized by the Fed (note: the Fed works on past data) rates will be pulled back and mortgage rates will fall. Over the past six recessions, mortgage rates have fallen an average of 1.8 percentage points, with some dropping considerably more, from the peak of the recession to the trough. And in many cases they continued to fall after the fact, since it takes some time to turn the economy around. It is often said that housing will lead the economy out of a recession. And historically it has. The economy will not recover until housing leads the way out. Housing has that much impact on the economy.

During the 1980 recession, from January 1980 to July 1980, rates fell from 16 percent down to 11.8 percent. After the July 1990 recession which lasted to March 1991 rates again dropped from 11 percent to 8.8 percent. During the early 2000 recession which lasted from March 2001 to November 2001, rates rose to 7.4 percent only to drop to 6.8 percent. And during the great recession, from December 2007 to June 2009, lasting 18 months, rates increased to 6 percent only to drop afterwards to 4.9 percent.

Hopefully, history will repeat itself and rates will again fall and help both the buyers and sellers in the real estate market.