Historically speaking, the Fed’s inflation-fighting playbook always delivers a particularly hard hit to the U.S. housing market. When it comes to housing transactions, monthly payments are everything. And when mortgage rates spike—which happens as soon as the Fed goes after inflation—those payments spike for new borrowers. That explains why as soon as mortgage rates rose this spring, the housing market slipped into a housing cool down.

But that housing correction could soon lose some steam.

Over the past week, mortgage rates have declined fast. As of Tuesday, the average 30-year fixed mortgage rate sits at 5.05%, down from June, when mortgage rates peaked at 6.28%. Those falling mortgage rates give sidelined homebuyers immediate relief. If a borrower in June took out a $500,000 mortgage at a 6.28% rate, they’d pay $3,088 monthly in principal and interest. At a 5.05% rate, that payment would be just $2,699. Over the course of the 30-year loan that’s a savings of $140,000.

What’s going on? As weakening economic data rolls in, financial markets are pricing in a 2023 recession. That’s putting downward pressure on mortgage rates.

“The bond market is pricing in a high probability of a recession next year, and that the downturn will prompt the Fed to reverse course and cut [Federal Funds] rates,” Mark Zandi, chief economist at Moody’s Analytics, tells Fortune.

While the Fed doesn’t directly set mortgage rates, its policies do impact how financial markets price both the 10-year Treasury yield and mortgage rates. In expectation of a rising Federal Funds rate and monetary tightening, financial markets increase both the 10-year Treasury yield and mortgage rates. In expectation of a reduced Federal Funds rate and monetary easing, financial markets price down both the 10-year Treasury yield and mortgage rates. The latter is what we’re seeing now in financial markets.

As mortgage rates spiked earlier this year, tens of millions of Americans lost their mortgage eligibility. However, as mortgage rates begin to slide, millions of Americans are regaining access to mortgages. That's why so many real estate professionals are cheering on lower mortgage rates: They should help to increase homebuying activity.

While lower mortgage rates will undoubtedly prompt more sideline buyers return to open houses, don't pencil in the end of the housing correction just yet.

"The bottom line is the recent decline in mortgage rates will help at the margin, but the housing market will remain under pressure with mortgage rates at 5% (fewer sales, slowing house price growth)," wrote Bill McBride, author of the economics blog Calculated Risk, in his Tuesday newsletter. The reason? Even with the one-percentage-point drop in mortgage rates, housing affordability remains historically low.

"If we include the increase in house prices, payments are up more than 50% year over year on the same home," writes McBride.

There's another reason housing bulls shouldn't get too overconfident: If recession fears—which are helping to drive mortgage rates lower—are correct, it would cause some additional weakening in the sector. If someone is afraid of losing their job, they're not going to jump into the housing market.

"While lower rates by themselves are a positive for housing, that isn’t the case when accompanied by a recession and quickly rising unemployment," Zandi tells Fortune.

Where will mortgage rates head from here?

Researchers at Bank of America believe there's a chance that the 10-year Treasury yield could slip from 2.7 to 2.0% over the coming 12 months. That could make mortgage rates fall to between 4% and 4.5%. (The trajectory of mortgage rates correlates closely with the trajectory of the 10-year Treasury yield.)

But there's a big wild card: the Federal Reserve.

The Fed clearly wants to slow the housing market. The pandemic housing boom—during which home prices soared 42% and homebuilding hit a 16-year high—has been among the drivers of sky-high inflation. Reduced home sales and a decline in homebuilding should provide relief for the overstressed U.S. supply of housing. We're already seeing it: Plummeting housing starts is translating into reduced demand for everything from framing lumber to cabinets to windows.

But if mortgage rates fall too quickly, a rebounding housing market could mess up the Fed's inflation fight. If that happens, the Fed has more than enough monetary "firepower" to once again put upward pressure on mortgage rates.

“Whether we are technically in a recession or not doesn’t change my analysis. I’m focused on the inflation data...And so far, inflation continues to surprise us to the upside," Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, told CBS on Sunday. "We are committed to bringing inflation down, and we're going to do what we need to do."

Want to stay updated on the housing recession? Follow me on Twitter at @NewsLambert.