I wrote the other day that the best way to get lower mortgage rates again is a peace deal.
It’s pretty straightforward. Mortgage rates are only up these past few months because of the conflict with Iran.
If we didn’t have that, we could very well still be at those juicy sub-6% levels today.
Instead, we are around 6.75% and a 7-handle mortgage rate is a real possibility again.
But another way mortgage rates could fall would be a recession, not that it’s the preferred way to get rate relief.
Mortgage Rates Tend to Fall During Recessions
When the economy goes into recession, bond yields tend to drop.
It’s the old flight to safety adage where investors seek safe haven assets like bonds, which results in lower yields (interest rates).
In your typical recession, the 30-year fixed mortgage drops pretty sizably, as the 10-year bond yield acts as a bellwether for long-term mortgage rates.
We’ve see this play out in prior recessions, whether it was the brief 2020 pandemic recession, the 2008 housing crisis recession, or the 2001 and 1991 recessions.
In all of these recessions, mortgage rates dropped more than a full percentage point lower over time.
So one could logically assume that if we had another recession, mortgage rates would drop again as per usual.
Meaning if rates were 6.75% today, they might get back down to those sub-6% levels we saw back in February.
There’s just one little problem here. We’re currently battling high inflation, driven higher by the $100+ barrel oil caused by the conflict with Iran.
If that leads to a recession, bond yields might not drop. This was the case in earlier recessions in the 1970s and 1980s.
In fact, during the 1973–1975 recession and the early 1980s recessions (1980 and 1981–1982), high energy prices were a distinguishing feature.
One could argue that if we were to experience another recession soon, it’d be somewhat similar in that regard.
During those recessions, bond yields were flat or even increased. That wouldn’t be good for mortgage rates.
Sounds Like We Need a Peace Deal Either Way If We Want Lower Mortgage Rates Again
While there are some parallels to the 70s and 80s, energy-driven inflation that could lead to a recession, today’s oil shock is very directly tied to the closure of the Strait of Hormuz.
We didn’t have any energy issues prior to this unexpected development. And are in fact much more energy independent today than in the past.
So if that channel opens up again and prices normalize, bond yields drop, things get back on track.
Sure, it would still take time to get everything in order and get oil flowing again, but it’s a pretty specific issue. Not a larger, structural situation.
At the same time, the economy was generally moving in the right direction prior to this conflict, with inflation cooling substantially and labor holding up fairly well. Not too hot or too cold.
In other words, the most likely and straightforward path back to those sub-6% mortgage rates would simply be a deal that reopens the Strait of Hormuz and gets us back to the February 2026 status quo.
A recession without a deal on the Strait might not result in the lower bond yields needed to push mortgage rates back down.
