Blessings, curses, enigmas, paradoxes, etc… The state of home price appreciation in the U.S. is all of the above.  The positive case for home prices is as simple as glancing at the most recent update on the two major home price indices (HPIs) released this week by FHFA and Case Shiller.  Both agree that homes continue to appreciate at a historically elevated pace. Note the extreme difference between the price correction seen in early 2023 and the outright price depression associated with the Great Recession more than a decade earlier.  It goes without saying that if appreciation is going to decline (or even briefly turn negative, in the case of Case Shiller), this is what we’d want things to look like if we’re interested in maintaining healthy levels of demand among buyers. The counterpoint is that 4-7% annual growth in home prices significantly outpaces growth in income.  In other words, it’s not sustainable.  Combine that with mortgage rates over 7% and it’s an easy recipe for extremely poor affordability.  What can help affordability?  Here’s a list:
Home prices could fall
Rates could fall
Homes could get smaller (this would effectively make prices lower, but not in a way that would show up in the home price indices due to what’s known as “repeat sales” methodology)
Builders could build more homes/apartments/etc, and at a faster pace
Multiple roommates/families under one roof sharing expenses
The balance of other expenses could go lower

The Mortgage Bankers Association (MBA) didn’t publish updated weekly application numbers last week, which meant that this week’s data had to play catch up with any changes in market conditions.  Even as early as December 18th–the last time the application data came out–the writing was already on the wall due to the rate spike that followed the Fed announcement. If the index had been updated last week, we can safely assume that the index would have already been well on its way lower.  Either way, the most recent tally shows refi demand at the lowest levels since early 2024. Keep in mind, this data is seasonally adjusted, so we’re not merely witnessing a drop in application activity due to the holidays.  It’s a genuine response to the moderate-but-quick rate spike seen in the 2nd half of December.  There are a few silver linings, or at least a few qualifications.  First off, the rate spike leveled off by last week and we haven’t broken to new highs since then. Additionally, there’s no need to worry too much about volatility in refi demand in this range because the overall level of activity is still effectively bouncing along historical lows in the bigger picture.  Only two things will change this: time and/or a much bigger drop in rates than we saw in 2024. Purchase demand keeps chugging along.  Although it also dropped over the past 2 weeks, that drop represented a smaller proportion of the prevailing range–one that’s been relatively narrow and uneventful since bottoming out more than a year ago.

Today’s ISM Manufacturing report was the only top tier economic data this week.  While we wouldn’t say it was “strong” by any means, it wasn’t weak either.  More importantly, it was higher than the previous reading and the median forecast, both for the headline PMI and the “prices paid” component.  That’s a decent enough result to prevent bonds from getting any crazy ideas about rallying back toward the week’s best levels.  Trading levels went from modestly stronger to modestly weaker after the data.

The changes add some steps that would have to be taken before Fannie Mae and Freddie Mac could exit following statements from a Trump ally indicating plans for a near-term release.

The Stamford, Connecticut-based bank hired Steven Sugarman to be its president. The former bank CEO, who now heads one of the country’s largest mission-based lenders, will help drive an effort to close a capital gap.

Bill Ackman, founder of Pershing Square Capital Management, predicts Fannie Mae and Freddie Mac will be removed from conservatorship within the next two years.

The Freddie Mac mortgage rate tracker on Thursday morning showed the conforming 30-year fixed rate mortgage creep closer to the 7% level last seen in May.

Refinance demand fell precipitously as average contract interest-rates for most loans rose in the two-week leadup to Christmas.

The last time mortgage rates were moving with any sense of urgency was in the days surround the Fed’s rate cut on December 18th. Incidentally, that movement was sharply higher, which is just as likely as any other outcome when the Fed is cutting rates for a variety of reasons. The rate rise leveled off by the end of Fed week with the average lender offering top tier conventional 30yr fixed rates near 7.125.  The average is only modestly lower today (7.07) and hasn’t moved much at all since then.   This sort of ambiguity is the default game plan for winter holidays due to changes in bond market participation.  It’s also a byproduct of the available economic data.  In not so many words, the Fed was the last major input, and we won’t get to the next one until next Friday’s jobs report.   Between now and then, moderate movement in either direction is possible, but any significant changes will require a surprise in the data.

Uneventful Start to 2025

Bonds began the day in moderately stronger territory before losing ground after the Jobless Claims data.  AM selling stalled out shortly after bonds hit negative territory and settled sideways to slightly stronger in the afternoon. While that constitutes a reasonably amount of volatility (as did the previous session on Tuesday), the magnitude of the movements has been fairly mild.  All in all, it’s an uneventful start to the new year and a typically boring winter holiday trading environment.  If there’s one thing to focus on, it’s that trading levels are still right in line with the day after Fed day.  If there are two things, the second would be that yields are a bit lower than they were at the end of last week.

Econ Data / Events

Jobless Claims

211k vs 222k f’cast, 219k prev

S&P Manufacturing PMI

49.4 vs 48.3 f’cast, 49.7 prev

Market Movement Recap

09:30 AM Stronger overnight, erasing Tuesday weakness, but backtracking a bit now.  MBS up an eighth and 10yr down 2.5bps at 4.547

11:22 AM Weakest levels now.  MBS still up 2 ticks (.06) and 10yr still down 0.3bps at 4.569

04:13 PM MBS right in line with previous levels, up 2 ticks (.06) and 10yr down 1.3bps at 4.559