Economic Downturns Could Affect Mortgage Rates, Northeast Iowa Real Estate

How Economic Downturns Could Affect Mortgage Rates: Lessons from a Real Estate Investor - Northeast Iowa Real Estate

Since starting my real estate investing journey in 2005, I’ve seen my fair share of market fluctuations. From boom times to full-blown crashes like we saw in 2008, the truth is, there’s always an opportunity for certain homebuyers, even in a downturn. The market doesn’t stop during a recession. It just shifts. If you're financially ready, that shift can actually work in your favor.

One of the most immediate and noticeable impacts of an economic downturn is how it affects mortgage rates. Historically, during tough economic times—like the 2008 financial crisis and again in 2020—mortgage rates tend to fall. This is often due to the Federal Reserve lowering the federal funds rate to stimulate borrowing and boost economic activity. Lower mortgage rates make it easier for homebuyers to secure loans, and they can help keep the housing market stable, even in challenging economic conditions.

There are deals to be had even in tough markets. Northeast Iowa real estate

1. Why Mortgage Rates Fall in a Downturn

In the past, during economic depressions or recessions, we've seen mortgage rates drop as a way to encourage spending and investment. In 2008, when the economy took a sharp downturn, the Fed slashed rates, which resulted in some of the lowest mortgage rates in history. We saw the same thing in 2020 when the pandemic wreaked havoc on the global economy.

The rationale is simple: when interest rates fall, it’s cheaper for people to borrow money, whether it’s for buying a house or starting a business. This boost in borrowing helps stimulate economic activity, which is exactly what the Fed wants to see. If you’re financially prepared, lower rates can make homeownership more affordable and even allow you to refinance into a lower rate, saving money over time.

2. Expect Volatility in Today’s Market

However, this time around, things are messier. There’s volatility everywhere. Even though we could see rates fall during an economic downturn, they might also shoot back up in response to any good economic news. This is the uncertainty that we're experiencing right now.

Many experts in the real estate industry, myself included, predict that mortgage rates for a 30-year fixed loan will hover between 6.5% and 7.25% for most of 2025, with weekly fluctuations within that range. If you’re holding out for rates to drop to 4% or 5%, you might be waiting longer than you'd like. It's going to take far more negative economic news to see rates fall significantly.

3. Lender Risk and Tightened Lending Standards

Along with the changes in mortgage rates, economic downturns often bring about tighter lending standards. Even though rates could fall, lenders become more cautious during periods of economic uncertainty. In a downturn, higher levels of job loss and financial stress increase the risk of defaults on loans, prompting banks to raise their lending standards.

This means that while rates may be lower, it could be harder to qualify for a mortgage if your financial situation isn’t in the best shape. So even though lower rates can present an opportunity, not everyone will have access to the benefits.

4. Opportunity for Prepared Homebuyers

While fewer buyers might be actively looking for homes during an economic downturn, those who are financially ready to buy can benefit from lower rates and possibly lower home prices. In a recession, the market shifts, but it doesn’t stop. Some sellers may be more motivated to make a deal, which could open the door for bargain hunters.

Even in a recession, there are opportunities for savvy investors and homebuyers who have prepared for such shifts. I’ve personally seen this in my years of real estate investing—there are always deals to be made, even when the market is tough whether it's in homes for sale in New Hampton, Iowa or land for sale Crawford County WI.

Conclusion: Market Shifts, Not Stops

In the end, economic downturns and fluctuations in mortgage rates are inevitable. While we might see rates drop during a downturn, it’s important to understand that the market is always shifting. This time, it’s messier, with volatility more present than ever. But if you’re financially prepared and understand the nuances of the market, you can still find opportunities. Just be aware that rates might not fall as dramatically as in previous downturns.

If you’re waiting for rates to dip into the 4% or 5% range, you could be waiting longer than you’d like. Keep an eye on the market, stay flexible, and if the right opportunity comes along, be ready to seize it.

Reach out for more discussion on how we can help you during these times!

LeNae