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Why Do Mortgage Interest Rates Fall During A Recession?

By Ann White

Mortgage interest rates increase or decrease during the different phases of a normal economic cycle. At the present time interest rates are at 30 year lows. What causes the interest rates charged by banks for mortgage loans to fall during a recession?

Demand For Mortgages Decreases

The main reason that mortgage interest rates decline during a recession is that real estate sales decrease in number and the demand for home mortgages also falls. Mortgage interest rates follow the simple supply and demand law that all goods and services must obey: If supply exceeds demand prices go down, if demand exceeds supply prices go up. Interest on mortgages is just the price you pay to borrow money. During a recession, the demand for money (in the form of a loan) decreases and the price of money (interest rate) also goes down. Banks lower the price of their money until consumers find the price attractive and take out a mortgage to buy a house.

Banks Pay Less For The Money They Borrow

When the economy is slow, the Federal Reserve lowers the interest rate that it charges banks to borrow money in an effort to stimulate the economy. Banks also pay a lower interest rate on the money that customers deposit in the bank. Since banks pay a lower interest rate on the money they borrow, in order to remain competitive, they can make loans with a lower mortgage interest rates during a recession.

Inflation Expectations Are Lower

During times of recession, the fears of inflation are lower because the supply of goods and services outpace the demand, and in order to sell products companies lower their prices. When inflation worries are minimal, then banks do not have to charge high mortgage interest rates to offset the declining value of money that is caused by inflation

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1. How Does Inflation Affect Mortgage Interest Rates?
2. Has The Recession Affected Mortgage Rates?
3. How Has The Recession Affected Mortgage Rates?
4. How Do Mortgage Interest Rates Affect Inflation?
5. Why are mortgage rates rising now?