The unexpectedly low mortgage rates of the pandemic era, a fleeting economic silver lining, are unlikely to make a comeback—and for good reason. Economists warn that such rock-bottom rates, while seemingly advantageous for homebuyers, could spell trouble for the broader United States economy.
Contrary to the popular appeal of lower mortgage rates, financial experts, including a former Federal Reserve economist, suggest that a return to the 2 percent to 3 percent rates might indicate severe economic distress. These rates, reflective of the pandemic’s financial emergency measures, are an unfeasible expectation in a recovering economy, and serve as a potential harbinger of a major economic downturn.
During the height of the pandemic, mortgage rates plummeted, providing an unprecedented opportunity for homebuyers. The opportunity didn’t arise from deliberate efforts by the U.S. government to encourage homeownership during the pandemic: Mortgage rates reached such unprecedented lows in response to the COVID-induced financial crisis, prompting the Fed to reduce its policy rates to nearly zero as a means of stimulating an economy grappling with recession.
To bring mortgage rates back to those levels, the U.S. economy would have to fall into a “severe recession,” former Federal Reserve economist Claudia Sahm told Newsweek. Sahm is known for her work, including the Sahm Recession Indicator, which has a track record of accurately signaling recessions using the unemployment rate since 1970, with minimal false alarms.
According to Sahm, that recession “doesn’t have to be as severe or as sudden as COVID, but, like the Great Recession [of 2008], the Fed cut rates to 0 fairly quickly and there was a financial crisis, but also the unemployment rate shot up to 10 percent.” The economist said that when interest rates are low, “yes, that seems great, but when they’re really low, that means that something bad has happened.”
Sahm said that the U.S. isn’t in a situation where the Fed needs to slash rates quickly. Instead, the Fed is on a sustainable path to bringing inflation down to its 2 percent target level, and even signaled to the potential of four rate cuts this year, which would inevitably bring mortgage rates down.
But How Much Will They Fall This Year?
While there is an understanding that mortgage rates reaching pandemic-era levels of 2 percent to 3 percent is “highly unlikely,” there is consensus that rates are poised to decline. But just how much of a decline is up…
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