While falling mortgage rates will improve affordability, the "lock-in effect" for existing homeowners with ultra-low rates will persist. This will suppress the typical sales volume rebound, leading to an anemic 3% growth in purchase volumes, a historically tepid response to improved affordability conditions.

As mortgage rates fall, more homeowners will list their properties, increasing inventory. This rise in supply will happen concurrently with the rise in demand from improved affordability. This dynamic will prevent a surge in home prices, keeping annual appreciation capped at a modest 2% for the upcoming year.

Historically, the housing market was a key driver of the economic cycle. Now, despite mediocre performance, it's a minor feature in the economic outlook. A "tug of war" between low supply and poor affordability has led to a stagnant market that no longer dictates the economy's health.

The 2008-2010 first-time homebuyer tax credit serves as a cautionary tale. While it caused a temporary rise in sales, it primarily pulled demand forward. The housing market hit its post-crisis lows only after the program expired, suggesting such policies don't fix underlying problems.

The tightening of agency mortgage spreads from the government's $200B purchase program is expected to have a positive "portfolio channel effect" on other risk assets. Securitized credit, particularly the non-qualified mortgage (non-QM) market, is positioned as a key beneficiary of this ripple effect as investors reallocate capital.

The plan to buy mortgage bonds is not a direct solution for homeowners but a form of money printing (QE). This move likely props up banks holding increasingly unattractive mortgages as housing prices are pushed down, effectively bailing out financial institutions rather than individuals.

A U.S. administration decision for mortgage agencies to buy $200 billion in mortgages had an instant market impact, causing spreads to tighten quickly. In response, Morgan Stanley's mortgage strategy team moved from a positive to a neutral stance, demonstrating how fast regulatory news is absorbed by financial markets.

Unlike the Federal Reserve which can create reserves, Fannie Mae and Freddie Mac (GSEs) must fund their mortgage purchases. While they have significant retained earnings, they will likely need to issue short-term debt, creating a funding challenge as they buy long-duration assets with spreads that are negative to their funding costs.

A significant housing market recovery requires a substantial and sustained improvement in affordability. Analysts estimate a 100-basis-point drop in mortgage rates (e.g., to 5.5%) is needed to trigger a meaningful pickup in sales. However, this growth is not immediate; sustainable increases in sales volumes typically materialize a full year after the affordability improvement occurs.