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.

Core components of today's financial landscape, including FDIC insurance, Social Security, and even the 30-year mortgage, were not products of gradual evolution. They were specific policies created rapidly out of the financial ashes of the Great Depression, demonstrating how systemic shocks can accelerate fundamental structural reforms.

A sustainable recovery in housing activity requires a roughly 10% improvement in affordability. Morgan Stanley calculates this threshold will be met when mortgage rates fall to approximately 5.5%, a specific target needed to meaningfully "unstick" the market from its current low-activity state.

According to BlackRock's CIO Rick Reeder, the critical metric for the economy isn't the Fed Funds Rate, but a stable 10-year Treasury yield. This stability lowers volatility in the mortgage market, which is far more impactful for real-world borrowing, corporate funding, and international investor confidence.

Fed rate cuts primarily lower short-term yields. If long-term yields remain high or rise, this steepens the curve. Because mortgage rates track these longer yields, they can actually increase, creating a headwind for housing affordability despite an easing monetary policy.

A major driver of today's housing scarcity is that homeowners, particularly Boomers, who refinanced into sub-3% mortgages have no financial incentive to ever sell. This seemingly positive economic condition has had the negative side effect of locking vast amounts of housing inventory in place, worsening the supply crisis.

The gap between existing mortgage rates (under 4.25%) and new rates (over 6.25%) is over 200 basis points. This spread, which disincentivizes homeowners from selling, has persisted for three consecutive years. Historically, the gap only exceeded 100 basis points for a total of eight quarters over the past four decades, making the current situation a major anomaly.

Three-quarters of US household wealth is in homes. BlackRock's Rick Reeder argues that a healthy housing market is critical for the broader economy, as it unlocks labor mobility (allowing people to move for jobs) and creates construction jobs. Lower mortgage rates are key to stimulating this velocity.

Morgan Stanley analysts argue that mortgage rates follow the 5- and 10-year Treasury yields, not the Fed Funds rate. As evidence, they note that while the Fed has cut rates by 100 basis points over the past year, the average mortgage rate has actually increased by 25 basis points during the same period.