For a moment this week, the bond market flashed a signal that some associate with impending recessions. Home buyers need not worry just yet, according to economists.
Market experts note that while yield-curve inversions are strong economic indicators that can signal the risk of a potential recession, they don’t tell investors definitively when an economic downturn is likely to come. In particular, when rates fall as they did in 2020 and 2021, mortgage borrowers are likely to refinance and take out a new loan to lock in a lower interest rate, which then wipes out their old loan. Over the past few years, consequently, “mortgages were, in effect, a shorter term investment,” Fratantoni said.
Today, fewer people choose to take out ARMs — a byproduct of the last housing crisis when many homeowners were burned by adjustable-rate mortgages. If those loans were still popular, however, “A flattening yield curve would essentially mean that ARMs are less attractive, and people would shift from ARMs into more fixed-rate mortgages,” Kapfidze said.
Among the assets the Fed bought during that time were mortgage-backed securities. This helped to drive a great deal of liquidity into the mortgage market, which allowed lenders to cut rates to the record lows that were seen.
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