- Mortgage rates are trending downward from recent peaks.
- They could fall further if the economy continues to slow and the Fed cuts rates.
- However, that might not make it much easier to buy a house, some experts say.
It’s getting cheaper to borrow money to buy a house.
But would-be homebuyers shouldn’t celebrate prematurely. Lower mortgage rates could be a red flag for serious economic weakness and potential recession.
“Usually in a recession, we see interest rates dip as investors flock to more safe-haven assets like government bonds and other bonds,” Danielle Hale, chief economist at Realtor.com, told BI. “Mortgage bonds would be included in that.”
The average rate on a 30-year mortgage was 6.67% for the week ending March 20, down from 7.04% for the week ending January 16, according to data from Freddie Mac. And rates are expected to continue falling. While the Federal Reserve held rates steady at Wednesday’s FOMC meeting, the market is pricing in two cuts for 2025. Meanwhile, President Donald Trump is openly urging the Fed to cut rates sooner rather than later.
Mortgage rates continuing to decline might sound like a good thing for prospective homebuyers, but it’s more complicated than that.
“While the idea of interest rates coming down is appealing to many consumers and businesses, the reason for lower interest rates is very important,” Greg McBride, the chief financial analyst at Bankrate, said in a March 17 note. “We want interest rates to decline because inflation declines, not because of economic weakness.”
Here are three reasons lower mortgage rates could be bad news for the US economy and homebuyers.
Recession chances are creeping up
A trade war is underway, government spending is being cut, and immigration is being restricted — all of which can hurt economic growth. Across Wall Street, analysts are raising their chances of a recession from a baseline of 15% earlier this year to almost 40% now. They’re also downgrading their expectations for GDP growth.
More than the tariffs themselves, the volatility of on-again, off-again tariff negotiations creates an environment where businesses and consumers are reluctant to make big decisions regarding investment and spending. And if blanket tariffs are actually implemented, the raw materials used for construction will get increasingly expensive. The cost of labor will also rise if immigration policies become more restrictive.
If a recession does play out, the Federal Reserve may indeed cut rates faster than anticipated to encourage growth, sending mortgage rates down as well.
Consumers are already in a rough spot — and recession could make that worse
But slower economic activity is bad for homebuyers, too. In a recession, more people lose their jobs and hold off on big purchases, including houses.
And while the economy isn’t in recession, the American consumer isn’t in great shape. Households are strapped for cash. In February, the New York Federal Reserve Bank found that only 62.7% of households could come up with $2,000 for an emergency expense. That’s the lowest percentage recorded since the bank began tracking this data in October 2015. For consumers who have trouble covering a one-off $2,000 expense, committing to buying a house will be even more difficult.
“In a recent survey of consumers about attitudes towards buying a home, we also saw growing concern about households’ personal financial situation,” Hale said. “If they are not confident in their ability to maintain a mortgage payment, sometimes that’s enough to keep people from moving forward with the home purchase.”
Housing supply will become more constrained
If rates drop without an increase in housing supply, then home prices could skyrocket as they did during the pandemic, Hale said.
Right now, housing supply is tight — Hale estimates that the US is roughly 3.8 million homes short of what’s needed.
In a recessionary environment, higher unemployment might normally lead some homeowners to sell their houses. But if a downturn were to strike this time around, housing supply wouldn’t improve, according to Chen Zhao, lead economist at Redfin.
That’s because those who bought houses during the pandemic were able to secure low mortgage rates, meaning that they’re not sitting on much debt and have a lower risk of bankruptcy. Plus, job losses tend to disproportionately impact lower earners, who typically rent.
“This all adds up to few forced sales and home prices are unlikely to fall,” Zhao wrote in a recent note.
