The Reawakening Refi Engine Behind U.S. Momentum

• Conventional mortgage rates have dropped 175 basis points since late 2023.

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

• Fannie Mae said refinancing activity is up 140% year-over-year.

A subtle but powerful economic growth driver is starting to come alive…

For the last few months, I’ve been highlighting what I believe will be an important economic catalyst this year - mortgage refinancing activity. You see, over the last few 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 has been under steady pressure. Last summer, it was down to 6.8%. And now, with the Federal Reserve having lowered interest rates, it has dropped below 6.1%.

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 $500 a month. That’s money that can go toward furnishings, travel, or investments. Over the life of the loan, it adds up to about $170,000 in savings. And if rates fall further, the benefits will 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 140% from 2025—and 190% from 2024.

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 real 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.

The numbers we just surveyed make the story pretty clear: the refinancing engine is revving up again. With the drop in mortgage payments, a family purchasing a $400,000 home is now keeping roughly $5,200 a year that would’ve gone to interest back in late 2023. That’s real spending power flowing back into households.

And the runway isn’t used up. The Fed has endorsed at least one cut in 2026, While Wall Street is penciling in two. If 30‑year mortgage rates fall in line, homeowners could see another round of meaningful monthly relief.

This isn’t simply a story about lower borrowing costs — it’s about releasing actual cash. Thousands of dollars per family, year after year. That kind of shift doesn’t seep into the economy, it surges through it. It boosts consumption, supports earnings, and accelerates growth.

If the Fed keeps easing, we’re not looking at a gentle rebound — we’re looking at a renewed upswing. The spending power is in place. The liquidity is building. The catalyst isn’t on the horizon. It’s already in motion. And it should provide a solid foundation for continued strength in the S&P 500.

Five Stories Moving the Market:

European officials have shown a willingness to engage and negotiate with the Trump administration in an effort to defuse tensions over Greenland; they are simultaneously preparing a firmer, more unified European stance to deter any move that threatens Danish sovereignty or Greenlandic self‑determination - NY Times. (Why you should care – officials expressed a willingness for a larger NATO presence in the Arctic, expanded U.S. troop deployments, and new investment agreements tied to Greenland’s resources)

A treaty between the United States and Denmark, signed in 1951 at the end of the Truman administration, gives the United States broad rights to reopen the 16 or so military bases that it once had on Greenland; for a few billion dollars the United States has the right to build deep ports, long runways, radar stations and launch sites for missile defense interceptors – Newsweek. (Why you should care – this could be an offramp to ratcheting down tensions with European allies related to the White House’s ownership ambitions)

Japanese Prime Minister Sanae Takaichi officially called an early election next month and promised a temporary sales tax cut on food if she wins a fresh mandate for her new coalition; Takaichi is betting that her ruling Liberal Democratic Party can strengthen its slim majority in parliament in a February 8 election - Bloomberg. (Why you should care – a victory by Takaichi would likely weigh on the yen while boosting the outlook for spending and economic growth) 

The International Monetary Fund raised its 2026 global growth forecast higher by 0.2% to 3.3%, as businesses and economies adapt to U.S. tariffs that have eased in recent months and a continued ​AI investment boom that has fueled asset wealth and expectations of productivity gains – Reuters. (Why you should care – it said growth estimates are now higher than they were in late 2024)

China’s economy lost more momentum last quarter even as it met the government’s target in 2025, in another year of lopsided growth that will be hard to sustain in an era of protectionism around the world – Bloomberg. (Why you should care – weak job growth and declining home prices are weighing on domestic economic demand)

Economic Calendar:

Earnings: DHI, FAST, FITB, KEY, IBKR, MMM, NFLX, UAL, USB, ZION

World Economic Forum in Switzerland

China – PBoC loan prime rate for January

U.K. – Average Earnings for November (2:00 a.m.)

U.K. – Unemployment rate for November (2:00 a.m.)

BOE’s Bailey (Governor) Speaks (4:45 a.m.)

BOE’s Ramsden (Deputy Governor) Speaks (4:45 a.m.)

Germany - ZEW Economic Sentiment for January (5:00 a.m.)

Treasury Auctions $89 Billion in 13-Week Bills (11:30 a.m.)

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

Treasury Auctions $85 Billion in 6-Week Bills (1 p.m.)

Treasury Auctions $50 Billion in 52-Week Bills (1 p.m.)

SNB’s Schlegel (Chairman) Speaks (11:30 a.m.)

ECB’s Nagel (Germany) Speaks (11:30 a.m.)

U.S. - American Petroleum Institute Crude Oil Inventory Data (4:30 p.m.)