If you want to argue that orthodoxy has it backwards when it comes to rates and US home prices, you have to make the case that the demand boost from a given decline in financing costs won’t overwhelm any accompanying increase in supply from a loosening of the so-called “golden handcuffs” dynamic.

There are a number of vectors on which the persistence of high rates is arguably contributing to inflation in the US. The housing market’s the quintessential example. Market rates remain far above the average rate on the nation’s mortgage stock, effectively locking existing homeowners with low rates into their homes. That’s created an acute dearth of resale supply, in turn putting a floor under prices. Would-be buyers are thus grappling with high rates and high prices. Put it all together and you get moribund existing home sales, record low contract signings and so on.

One ostensible “fix” is lower rates, the assumption being that cheaper financing costs for trade-ups will unlock supply and thereby help the market find a better balance. The pushback says there’s simply too much pent-up demand. That the supply response to lower rates can’t possibly keep up. And that unleashing all that demand will lead to bidding wars and even higher prices.

An overshoot on the shelter component in Wednesday’s CPI report — and the perception that the warm read on core price growth closed the door to a 50bps Fed cut next week — was a reminder that this debate remains not only topical, but pivotal for the macro-monetary policy nexus. It’s also a political flashpoint. Kamala Harris wants to give first-time homebuyers a $25,000 tax credit to help ease the increasingly onerous cost burden associated with achieving the American dream. Critics claim that’ll backfire.

That’s the context for yet another big drop in mortgage rates, which I’d be remiss not to mention even as editorializing around every weekly MBA update admittedly feels a bit superfluous by now.

As the figure shows, this week’s 14bps decline was the largest in over a month (i.e., since the early-August growth scare) and the ninth in 10.

Rates haven’t posted a WoW increase on the MBA’s gauge since July 3.

The question is whether there was a demand response in the form of purchase activity. The answer’s a tentative “yes.” The purchase index — as distinct from refis and overall apps — rose around 2% over the week. But as the figure below makes abundantly clear, we’re not exactly off to any races here.

“Purchase applications… are edging closer to last year’s levels,” MBA VP Joel Kan remarked. He was quick to note that “despite the drop in rates, affordability challenges and other factors such as limited inventory might still be hindering purchase decisions.”

In other words, the combination of six-handle mortgage rates and prices north of $420,000 for the typical single-family detached — new or “used” — is still more than prohibitive when it comes to the latent demand tsunami that many are convinced will come crashing ashore below some magic level for rates. Call it 5.5%, maybe.

As noted here earlier Wednesday, I’m torn on this debate. On one hand, there are millions of Americans just waiting for the numbers to add up, which is to say waiting for rates to fall such that monthly payments on starter homes dip below 35% of monthly income, the threshold banks like to keep borrowers under to feel comfortable. As soon as that math “works,” the buying will start, and if that buying manifests in multiple bids, prices will rise.

On the other hand, there’s a glut of inventory on the new construction side which can presumably absorb at least a portion of any demand the resale market can’t sate. At the end of the day, the current conjuncture — i.e., a frozen resale market, a worsening affordability crisis and, ultimately, rising homelessness — simply isn’t tenable. And you know what they say about things that “cannot go on forever.” (They stop.)