Early Alzheimer’s disease (AD) is associated with hippocampal hyperactivity and decreased sleep quality. Here we show that homeostatic mechanisms transiently counteract the increased excitatory drive to CA1 neurons in App NL-G-F mice, but that this mechanism fails in older mice. Spatial transcriptomics analysis identifies Pmch as part of the adaptive response in App NL-G-F mice. Pmch encodes melanin-concentrating hormone (MCH), which is produced in sleep–active lateral hypothalamic neurons that project to CA1 and modulate memory. We show that MCH downregulates synaptic transmission, modulates firing rate homeostasis in hippocampal neurons and reverses the increased excitatory drive to CA1 neurons in App NL-G-F mice. App NL-G-F mice spend less time in rapid eye movement (REM) sleep. App NL-G-F mice and individuals with AD show progressive changes in morphology of CA1-projecting MCH axons. Our findings identify the MCH system as vulnerable in early AD and suggest that impaired MCH-system function contributes to aberrant excitatory drive and sleep defects, which can compromise hippocampus-dependent functions.