I wrote the other day that the best way to get the lowest mortgage rates is a peace agreement.
It’s straight forward. Interest rates have risen over the past few months due to the conflict with Iran.
If we didn’t have that, we would be at those levels with less than 6% water today.
Instead, we’re closer to 6.75% and a 7-handle mortgage is a real possibility as well.
But another way mortgage rates could fall would be a recession, not that it’s the preferred way to get rate relief.
Mortgage Rates Often Fall During Recessions
When the economy enters a recession, bond yields tend to fall.
It’s an old safety-flying phrase when investors seek safe assets like bonds, which lead to lower returns (interest rates).
In your typical recession, the 30-year mortgage rate drops significantly, as the 10-year bond yield acts as a bellwether for long-term mortgage rates.
We’ve seen this play out in previous recessions, whether it was the brief recession of 2020, the housing bust of 2008, or the recessions of 2001 and 1991.
Throughout this recession, mortgage rates have fallen more than a full point over time.
So one can logically assume that if we have another recession, mortgage rates will go down again as usual.
Which means if rates were 6.75% today, they would likely return to the sub-6% levels we saw in February.
There is just one small problem here. We are currently battling high inflation, fueled by $100+ barrels of oil fueled by the conflict with Iran.
If that leads to a recession, bond yields may not go down. This was the case in previous recessions in the 1970s and 1980s.
In fact, during the recession of 1973-1975 and the recession of the early 1980s (1980 and 1981-1982), high prices were a distinguishing factor.
One could argue that if we experience another recession soon, it will be somewhat similar to that.
During that recession, bond yields either went down or went up. That won’t be fair with mortgage rates.
Sounds Like We Need A Peace Deal Either Way If We Want Low Home Rates Again
While there are some parallels in the 70s and 80s, energy-driven inflation can lead to recession, today’s oil shock is directly linked to the closure of the Strait of Hormuz.
We had no power problems before this unexpected development. And actually more independent power today than in the past.
So when that channel opens up again and prices normalize, bond yields go down, things get back on track.
Sure, it will still take time to get everything fixed and the oil flowing again, but it’s a definite problem. It is not a larger, structural situation.
At the same time, the economy was moving in the right direction before this conflict, with the inflation rate very cool and the labor force holding up well. It’s not too hot or too cold.
In other words, the most possible and direct way to return to those levels below 6% of the loan would be an agreement that reopens the Strait of Hormuz and returns it to the status quo in February 2026.
A recession without a deal in the Straits may not lead to the lower bond yields needed to push down lending rates.
