“The man shapes iron into a cutting tool and does his work over the coals, fashioning it with hammers and working it with his strong arm. He also gets hungry and his strength fails; he drinks no water and becomes weary.”
–Isaiah 44:12
Blacksmiths have been toiling over smoldering coals for ages. Hot forging is their process where a piece of metal is heated to a high temperature and then shaped by hammering, pressing or rolling it into a desired form. It survives today in mass production manufacturing, but it’s also become an art form. Many modern blacksmiths work as artists, creating decorative and functional items, while others specialize in specific trades like farriers who shoe horses, bladesmiths who craft knives and swords and armorsmiths who create armor. How hot is hot? Optimal hot forging temperatures range between 1,500°F and 2,500°F. Before thermometers, blacksmiths knew steel was ready to bend just by observing the color. They heated the metal until it reached a bright yellow-orange hue, which meant it was soft enough to be shaped, but still strong enough to bend without breaking.
In the dismal science, metaphorical blacksmiths could be tasked with bending trends or fabricating inflection points. One trend that moves especially slowly – as if hammered by a blacksmith – is rents. The consumer price index (CPI) for owners’ equivalent rent (OER) glides through business cycles, twisting on a gentle path. When evidence comes to the fore that suggests rents should heat up or cool down, OER’s shift takes its sweet time before presenting itself.
Consider the current backdrop. Through September, OER had moved up and to the right until the government shutdown (teal line). So much time has passed, that October’s OER will never see the light of day. Never you mind. The Mortgage Bankers’ Association’s (MBA) more volatile series for the average home purchase loan size hot-forge bends OER’s path to a shallower slope. The first week of November’s $431,400 stretched the sideways track in place since New Year’s 2024 (lilac line). This prolonged response is typical. When the average loan size topped in early 2008, we had to wait until late 2009 for OER to finally succumb to 2010. That episode suggests cooling will manifest into year-end and through next year.
When we previewed the September CPI in late October, our expectation for a step down in OER – which did occur, at a 0.135% month-over-month (MoM) change vis-à-vis the prior 0.382% (light blue line) – was predicated on rising existing home months’ supply. MBA average purchase loan sizes advance the pricing environment into real-time. Normalizing through a year-over-year (YoY) trend shows downward pressure in September, October and thus far in November (red line). For perspective, previous bouts of YoY declines during the late-2000s housing bust guided OER leading up to and through the Great Recession. The rebound that followed into the 2010s expansion foresaw the faster rent run-rate in train. Recent years’ sharp run-up and subsequent normalization in average loan sizes laid the groundwork for OER to follow a similar mountainous path.
Shifting gears from price to demand, the MBA mortgage application home purchase index, which had showed signs of life from February to July (fuchsia line), has yet to rebound, even with the sequential gain reported yesterday during the first week of November. Speculation about multiple applications boosting the figures and/or home sale transactions being cancelled has injected uncertainty into hopes of a post-pandemic bottom.
Cue the University of Michigan’s (UMich) consumer survey. One certainty is economic uncertainty on both the home-buying and selling sides of the equation. In the year ended November 2025, consumer uncertainty indices fell from -10 to -20 for buyers (lime line) and from -8 to -16 for sellers (yellow line). The deterioration has left these gauges at recessionary levels. More broadly, uncertainty filters through to labor and income concerns, a key pillar for the housing cycle.
The Dallas Fed Banking Conditions survey reinforces the narrative via residential mortgage loan demand. Its November reading came in at a net -1.6, scant improvement from September’s -3.0 and down noticeably from August’s 13.0, the best showing since December 2024. Hope for mortgage bankers loosening the purse strings is on hold.
Shifting gears from purchase to refinance applications, the bulge in refi activity since May has the feel of a cash grab. The average loan size for refis came in at $368,700; six months ago, this gauge was at $277,900. Smoothing things to a quarterly frequency, the fourth quarter-to-date advance ramped to a 23% YoY rate (orange line). Double-digit gains have been common over the last year and a half, occurring in five of six quarters since 2024’s third quarter. Cash. Grab.
The fact that the acceleration in refi activity has accompanied a high-rate environment adds to our trepidation. Taking the prime rate as a lending conditions proxy, the 7% is an indication of the Fed’s relative tightness in the current cycle. The New York Fed’s Household Debt and Credit Report showed the need for a cash grab emerging through 2025’s first three quarters. Transition into serious delinquency (90+ days) for all household loans rose to a cycle high 3.03% in 2025’s third quarter, an undeniable persistence from 2024’s fourth quarter reading of 1.70% (green bars). On a YoY basis (purple line), the metric last showed an uptrend of similar intensity leading into the Great Recession. Back then, refis faded as cycle blacksmiths bent the path lower in a high-rate environment.