The probability of a recession in the next year has been steadily rising since President Donald Trump’s Liberation Day tariff announcements upended the global economic order. Taken at face value, a recession would be bad news for American workers, since economic downturns are typically met with higher unemployment rates, stagnant wages and stifled consumer spending.
However, what’s bad news for the economy at large could be good news for homebuyers looking to snag a lower mortgage rate.
Borrowing rates on home loans typically decrease during times of economic contraction as the Federal Reserve slashes interest rates to spur economic growth. It’s not as simple as that, though: Mortgage interest rates are influenced by a number of factors, and the path to lower rates will require more than Fed rate cuts. Read on to learn what happens to mortgage financing during a recession and what a shrinking economy could mean for the housing market at large.
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Is the U.S. in a Recession?
Between volatility in the stock market, a looming trade war and dwindling consumer confidence, you might be asking yourself, “Are we in a recession?” The simple answer is no — at least, not by definition. A recession is defined as two consecutive quarters of negative GDP growth. GDP, or gross domestic product, is a measure of the total monetary value of goods and services produced within a country.
Data from the Bureau of Economic Analysis shows that the GDP decreased at an annual rate of 0.3% in the first quarter of 2025. In other words, the economy is shrinking, and we could be close to a recession. However, this is only one quarter of negative GDP growth, not the two technically required to define a recession.
Mortgage Rates Tend to Fall During Recessions
Mortgage rates declined during every recession in recent history, except for the 1973–1975 recession of “stagflation” — when inflation was high but economic growth was slow.
Since 2022, when mortgage rates jumped from about 5% into the 7% range, homebuying activity has been relatively stifled. Real estate economists have speculated that the housing market could pick back up if rates began to fall. In fact, four in five homebuyers are waiting for mortgage rates to drop before buying a home in 2025, according to a March U.S. News survey.
Although lower mortgage rates are key to affordable housing payments, they’re not the only thing that matters to homebuyers at this crucial juncture. In other words, falling rates may not be enough to lure homebuyers back into the market.
Widespread layoffs have shaken the federal workforce and consumer confidence has taken a nosedive over the past year, meaning that people simply don’t feel great about the greater economy. If Americans are preoccupied with their job security, they could be hesitant to make such a weighty financial decision as buying a house, regardless of falling mortgage rates.
Additionally, lenders tend to tighten their credit standards during recessions, according to the Federal Reserve Bank of St. Louis. This could make it harder for homebuyers to qualify for a mortgage altogether.
When It Comes to Recessions, Home Prices Are Difficult to Predict
The 2008 housing crisis means that many Americans associate recessions with falling home prices, but that’s not universally the case. The Great Recession was just one example of how home prices crashed leading up to a recession, but that was a unique moment in housing history. Underqualified borrowers were taking out risky mortgages they couldn’t afford — but lending standards are much more strict in today’s housing finance landscape.
Recessions can certainly lead to decreased demand for housing, which could put downward pressure on home prices. But recessions in the early 2000s and 2020 didn’t send home prices spiraling downward.
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Trying to forecast home price growth (or even housing market crashes) is difficult work. Some economists speculate that tariffs could increase homebuilding costs and mass deportations could cause construction labor shortages, both of which would make homes more expensive to build. But a property is only worth what someone is willing to pay for it.
Housing prices have been holding steady in recent months — but not really rising as expected during the spring homebuying season. Data from the housing platform Zillow shows that for-sale housing inventory has been rising as more sellers list their properties and homebuyers stay on the sidelines. Still, most industry groups are calling for positive home price appreciation in 2025 amid slightly lower mortgage rates.
It’s still too early to tell how the Trump administration’s economic policy — and a potential recession — could impact home prices. For now, you can’t really blame homebuyers for taking a wait-and-see approach when it comes to the housing market.
More from U.S. News
2025 Mortgage Rate Forecast: When Will Rates Go Down?
Historical Mortgage Rates: See Averages and Trends by Decade
Should You Wait for Mortgage Rates to Fall to Buy a House?
What a Recession Would Mean for Mortgage Rates originally appeared on usnews.com
