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.

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 official holiday dates may be in the rearview, but as far as interest rates and underlying bond markets are concerned, this was the last day of the winter holiday season.  The same logic would put the start of the holiday season at December 23rd–a day where the average top tier 30yr fixed rate was exactly the same as it was today. Today’s rates had a chance to end up slightly lower, but the bond market responded to a decent showing in this morning’s only major economic report.  The ISM Manufacturing Index (one of many monthly economic reports that can influence day-to-day rate momentum) didn’t suggest any major surge in activity, but it did come in slightly stronger than the market expected. The reaction was logically mild, sending the average 30yr rate up by 0.03%. The stakes increase next week as market activity traditionally increases quickly on the first full week of the year.  We’ll also get several other economic reports including Friday’s big jobs report–consistently in a class by itself when it comes to its power to influence interest rates.

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.

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

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.

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

Hello 2025, goodbye 2024. It’s been 50 years since Jaws or Godfather Part 2 were on the screens. A half a century since Kung Fu Fighting first graced our airwaves. Despite the turn of the calendar page, the issues bond markets, lenders, and vendors face are the same. “Rob, what’s the word on the street about companies (lenders and/or servicers) making money out there?” Well, to be blunt, there are lenders out there who are earning 25 basis points or more on production without any servicing. Then again, there are lenders eking out a gain with their servicing but losing money without it. Ask your management if your company would be profitable without servicing. If there is one thing that lenders have learned about being profitable without servicing, it is a willingness to hold sales and branches accountable… actually accountable through actions rather than merely talk. Do you want to engage in unprofitable activities just to try to outlive your competition? (Today’s podcast can be found here and this week’s is sponsored by The BIG Point of Sale, which offers a highly configurable, easy to install point of sale solution. Its simplified consumer workflows and web-based portals allow for consumers and loan originators to collaborate with the back-office team to keep everyone informed throughout the loan process. Hear an interview with The Big POS’ Matthew VanFossen on the ins and outs of mortgage technology, from creating valuable products to implementation and training that will help companies maximize success.)

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