America’s Hidden Tailwind: The Refinancing Boom

America’s Hidden Tailwind: The Refinancing Boom

• Conventional mortgage rates have dropped 150 basis points since late 2023.

• The monthly payment on a $400k loan has dropped by 15%.

• Fannie Mae said refinancing activity is up 68% year-over-year.

The next economic growth catalyst is quietly kicking in…

A few months ago, I highlighted what I believe will be an important economic catalyst in the coming year - mortgage refinancing activity. You see, over the last couple of years, we’ve seen a huge drop in home financing costs. After peaking at 7.8% in November 2023, the rate on a conventional mortgage came under steady pressure. Early this summer, it was down to 6.8%. And now, with the Federal Reserve having lowered interest rates, it has dropped all the way to 6.2%.

That move matters. As the Dallas Fed has noted, when policy rates fall, the transmission channel runs straight through the household balance sheet. Lower borrowing costs reopen the refinancing window, letting homeowners reset their mortgages at cheaper levels or tap accumulated equity through cash‑out refis. The same dynamic makes home‑equity credit lines more attractive, expanding access to revolving credit as property values rise relative to outstanding balances.

The net effect is simple: easing unlocks liquidity. Lower rates mean less interest paid over the life of the loan—and smaller monthly payments. That frees up disposable income. More money to spend. More money to invest. And more fuel for economic growth. That should underpin a steady rally in the S&P 500 Index.

But don’t take my word for it, let’s look at what the data’s telling us…

Lower borrowing costs boost the spending power of households and companies alike. Over the past few years, both Wall Street and Main Street have been dealing with some of the highest borrowing costs since the fed funds rate hit 6.5% back in 2000. Now, with the potential for even lower interest payments over the next 12 months, consumers and businesses are refinancing debt. That means more cash to deploy elsewhere.

To see the impact, let’s look at how the drop in mortgage rates changes monthly payments. As noted earlier, the rate on a traditional 30-year mortgage recently dipped below 6.2%, down from 6.9% this spring and 7.8% in late 2023, according to Freddie Mac. For a $400,000 home, that shift translates into real savings.

Compared to nearly two years ago, a buyer today is saving roughly $450 a month. That’s money that can go toward furnishings, travel, or investments. Over the life of the loan, it adds up to about $150,000 in savings. And if rates fall further, the benefits will only grow.

That’s why we’re seeing a boom in mortgage refinancing…

When rates spiked in early 2022, refi activity collapsed. Taking out a new loan meant paying more interest and facing a bigger monthly bill. By early 2023, refinancing transactions were down 86% year-over-year. But by August 2024, as the Fed signaled a return to easing, borrowing activity rebounded. According to Fannie Mae, refinancing activity is now up 70% from 2024—and 300% from 2023.

Now, look at the historical relationship between rising refis and economic growth…

In the chart above, I’ve mapped the annualized pace of growth in Fannie Mae’s Refinancing Application Level Index against GDP growth from the U.S. Bureau of Economic Analysis. The pattern is clear. When refinancing surges, GDP tends to follow. And when the mortgage boom fades, growth slows.

According to the data we just reviewed, the refinancing cycle is taking off again. And based on the change in mortgage payment data, families buying a $400,000 home are now saving about $5,200 per year compared to late 2023. That’s a meaningful boost in spending power.

But there’s more upside. The Fed has signaled at least one rate cut next year. Wall Street expects as many as two more in 2026. If that leads to similar sized drop in 30-year mortgage rates, it could mean similar sized monthly savings for homeowners.

At the end of the day, this isn’t just about cheaper loans, it’s about unlocking real money. Thousands of dollars per household, year after year. That kind of shift doesn’t trickle through the economy, it floods it. It fuels consumption, lifts earnings, and lights a fire under growth.

If the Fed delivers on its rate-cut roadmap, we’re not just watching a recovery, we’re watching a reacceleration. The spending power is there. The liquidity is building. The catalyst isn’t coming. It’s already here. The change should underpin a steady rally in the S&P 500.

Five Stories Moving the Market:

A fight over the next Federal Reserve chair is playing out in Washington and on Wall Street, with industry titans and Trump allies taking sides and the candidates themselves jockeying for position – WSJ. (Why you should care – Corporate executives are increasingly backing Fed Board Member Christopher Waller as they feel he would be the most pragmatic of the central bank chair candidates)

Japan’s chief currency official sent a warning on recent foreign exchange moves, after the yen weakened against the dollar; Atsushi Mimura said the government will take appropriate steps against excessive currency moves – Bloomberg. (Why you should care – Mimura is likely trying to talk up the yen without intervention)

Central banks in big economies are signaling they’re less inclined to lower interest rates; the Bank of Japan raised rates, the European Central Bank all but confirmed it was done with monetary easing, and the Bank of England cut rates in a narrow vote – Reuters. (Why you should care – the Fed has kept policy the tightest among major global central banks, meaning it has more cushion for easing policy further)

Cleveland Fed President Beth Hammack said she doesn’t see any need to change interest rates for several months after the central bank cut rates at its last three meetings; Hammack has opposed recent rate cuts because she is more worried about elevated inflation than the potential labor-market fragility – WSJ. (Why you should care – Hammack, who will be a voter next year, is one of the most hawkish Fed members but will likely be outnumbered by dovish voters)

Tencent Holdings has secured access to high-end Nvidia artificial-intelligence chips that remain restricted to Chinese buyers even after President Donald Trump’s recent semiconductor agreement with the country; the owner of the WeChat social-media app is China’s largest company by market value – Barron’s. (Why you should care – the article highlights the difficulty of trying to restrict Chinese companies’ access to high-end technology products)

Economic Calendar:

China – PBoC Loan Prime Rate for December

U.K. – Business Investment for Q3 (2 a.m.)

U.K. – GDP for Q3 (2 a.m.)

U.S. – Chicago Fed National Activity for September (8:30 a.m.)

U.S. – PCE for October (8:30 a.m.)

U.S. – Personal Income for October (8:30 a.m.)

U.S. – Personal Spending for October (8:30 a.m.)

Treasury Auctions $86 Billion in 13-Week Bills (11:30 a.m.)

Treasury Auctions $77 Billion in 26-Week Bills (11:30 a.m.)

Treasury Auctions $69 Billion in 2-Year Notes (1 p.m.)