“Housing is the business cycle.” – Edward Leamer (2007)
“Housing is the business cycle.”
– Edward Leamer (2007)
The Federal Reserve’s rate cut last week, its first since December, was hardly a surprise – markets had been anticipating it for months. The federal funds rate has moved down from its 2023 peak of 5.50% to 4.25%, and futures are pricing another 125 basis points of easing over the next year, with more likely into 2026. The bigger story is how long-term rates and mortgage spreads have moved, with the 30-year mortgage rate dropping enough to spark a surge in refinancing activity. Expectations of more Fed easing are part of the backdrop but not the only factor driving borrowing costs lower.
Refinancing applications surged to their highest levels this month since early 2022, Mortgage Bankers Association data shows, after the 30-year mortgage rate fell to its lowest level in over two years. For much of 2022 and 2023, refinancing was frozen as mortgage rates soared and homeowners with pandemic-era loans at 3% or less had little reason to move. With borrowing costs easing, that picture has changed. Even modest relief is already unlocking household demand. This is one of the fastest ways lower rates filter into household finances.
The backdrop for this resurgence is the affordability shock. When mortgage rates surged after 2021, the cost of financing a home relative to income jumped to multidecade highs. First-time buyer affordability indices sank, and average mortgage payments as a share of income climbed far above long-term norms. New buyers were locked out while existing borrowers stayed put, reluctant to give up low fixed-rate mortgages. Now, households are seizing the chance to lower payments after years of pressure from higher rates.
But there are limits to this potential refinancing boom. The main beneficiaries are existing homeowners, who can lower monthly payments and free up cash flow. It might do little to unfreeze housing turnover. Home sales are still near multidecade lows, as inventory is constrained and affordability remains stretched for new buyers. In other words, refinancing is providing consumer relief but not yet a broad housing recovery.
For the broader economy, this wave of refinancing works like a pay raise. Lower monthly payments free up cash that households can redirect into spending elsewhere. Housing has long been considered a lead actor in the business cycle, and this episode reinforces that point. The real question is whether this refinancing wave signals a genuine recovery or will merely buy households a brief reprieve from the pressure of high costs.
Between the Lines is a weekly blog by DoubleLine Portfolio Managers Sam Garza, Joseph Mezyk and Quant Analysts Fei He, CFA and Sunyu Wang that breaks down topical macro and market issues. For questions or suggestions please e-mail us at betweenthelines@doubleline.com. The views and opinions expressed herein are those of the authors and do not necessarily reflect the views of DoubleLine Capital LP, its affiliates or employees.
