My selection of economic topics to write about is getting narrowed as multiple reporting Federal agencies have stopped releasing economic data due to the Federal government shutdown. However, just before the government shutdown, the Federal Housing Finance Agency (FHFA) released its housing price index for July based on home purchases with mortgages financed or bundled by federal housing agencies. As illustrated below, average home prices financed through FHA peaked in January 2025 and have softened in price since.

Looking back to January 2020, housing prices began to rally by mid-2020 as people began to realize the ability to work remotely offered the opportunity to relocate. House demand jumped along with sales prices as the coronavirus began to spread worldwide.

The chart below illustrates the rise and fall of house prices going back to 1991. The rapid rise in house prices and overleveraged buyers culminated in the financial crisis and Great Recession, as homeowners could not pay their monthly mortgage payments. Home prices plummeted with the increase in foreclosures, and the housing prices did not bottom until January 2012.

Since 2012, home prices have fully recovered and are now possibly at another crescendo cycle, with the recent increase in home prices that has significantly outpaced household incomes. When the Federal Reserve reduced its discount rate to 0% in 2020, mortgage lenders were able to reduce fixed-rate mortgages to below 3%. National average fixed rate mortgages bottomed in January 2021 at 2.88% which offered millions of buyers the opportunity to lock in historic low mortgage rates. Home buyers could afford to pay more for houses with ultra-low fixed-rate mortgages.

However, the Federal Reserve began its inflation-fighting interest rate hike campaign in March 2022, and mortgage rates rose with each Federal Reserve rate increase. The Federal Reserve's last rate hike was in March 2023, and the range of fixed mortgage rates since then was a high of 7.9% in October 2023 and a low of 6.18% reached in September 2024.

For the week ending September 26, 2025, the national average fixed rate mortgage for conforming loans at or below $806,500 was 6.46%. This is slightly higher than the August average rate of 6.34%.

The Federal Reserve lowered the discount rate twice in late 2024, and mortgage rates did not change. Last month, the Federal Reserve lowered the discount rate by 0.25% and again, mortgage rates increased. This would indicate that lenders need to keep home loan rates in the low to mid 6% range based on the current cost of funds to remain profitable.

However, if the Federal Reserve lowers the discount rate one or two more times this year as forecasted by analysts, then the potential is for mortgage rates to decline going into the spring of 2026.

What Does This Mean to Me?

Home prices have soared in recent years and outpaced household incomes. Unless mortgage rates dramatically decline, house sale prices and activity may not change much in 2026. What may also be limiting home sales is the dire mood of consumers. As we have mentioned, the consumer sentiment index recently recorded its second-lowest level since the University of Michigan began reporting in 1972. Possibly adding to consumers’ concerns is the inability to buy a home or a different home.

I don’t anticipate a housing bust like in 2008, but I don’t think home prices will change much either. One would expect to see an increase in housing transactions if 2026 fixed mortgage rates drop below 6%. But the cost of buying and owning a home is still out of reach for many consumers. In many key areas in the US, renting is still cheaper than home ownership. The highest budget item for consumers is related to their home. If people decide to continue to rent or stay with the home they have, then presumably they will spend their extra savings on discretionary items or savings.

Investors apparently have the same projections regarding home improvement spending. Below is a chart of Home Depot (HD), a stock we held for many years and sold last year. Yesterday’s closing price is now below its March 2024 peak.

Investors are still bullish (positive) on the US stocks and especially the largest companies represented by the S&P 500 and technology represented by the NASDAQ indices. AI companies continue to dominate the media and lead most stock sectors this year in gains. We don’t expect much change in this leadership for the balance of 2025.

Below are the YTD returns of the major indices, with the foreign MSCI Ex US still leading the major US indices:

• MSCI Ex US:28.96%

• NASDAQ:18.01%

• S&P 500:14.16%

• Dow Jones Industrial Average:9.54%

• S&P Bond:6.83%

• S&P 400 Mid Cap:4.38%

• S&P 600 Small Cap:2.41%

Let us know if you have any questions or comments about this UPdate. We welcome the opportunity to assist you and your family in the pursuit of personal financial independence.