The housing market has faced challenges in recent years, with affordability reaching its worst point since the 1980s. Rising mortgage rates and skyrocketing home prices during the pandemic housing boom have made it increasingly difficult for prospective homebuyers to enter the market. However, Morgan Stanley’s strategists, led by Jay Bacow and James Egan, have a positive outlook for homebuyers in the coming years.
While the investment bank forecasts a modest 3% drop in nationwide home prices by next year, they anticipate significant relief in affordability due to a combination of factors. The primary driver of improvement is expected to be an increase in inventory, which has been in short supply in recent months. Additionally, mortgage rates are predicted to decrease over the next year, leading to improved affordability and a rise in for-sale inventory.
As mortgage rates decline, it is expected that both new home sales and existing home sales will increase, with single-unit starts trending higher as well. The growth in inventory is projected to counterbalance the increased demand, resulting in a slight decline in home prices. Furthermore, the decrease in mortgage rates will lead to even more substantial declines in home prices in real terms.
Although new home sales are expected to outperform existing home sales, the overall increase in sales will drive housing starts. Morgan Stanley predicts a roughly 10% increase in single-unit housing starts in the coming year. While this correction may not be significant, it provides some relief to homeowners and indicates a dynamic balance between homeowners and potential buyers.
Morgan Stanley’s strategists acknowledge the volatility in the housing market’s evolution thus far. Home prices have reached record highs, while sales volume has considerably decreased. Affordability remains heavily reliant on mortgage rates, which have been fluctuating. Even with the current decline in rates, affordability is projected to remain stretched, especially considering the possibility of rates reaching 8% again.
Looking ahead, if mortgage rates continue to trend lower as expected, the likelihood of homeowners listing their homes for sale will increase. The strategists anticipate a slight increase in the number of homes available for sale, which, coupled with rising single-unit starts, is predicted to result in a modest decline in home prices next year.
While specific forecasts for 2025 are not provided, Morgan Stanley believes that home prices will “outperform” their projections for 2024. However, uncertainties remain. The strategists warn that if mortgage rates stay high and the economic climate worsens, demand could soften, driving home prices down. Conversely, if demand remains strong, especially if rates hover around 7%, home prices could rise by 5% next year.
Overall, Morgan Stanley’s forecast brings hope to prospective homebuyers by suggesting a potential improvement in housing affordability by 2024. Factors such as increased inventory and declining mortgage rates contribute to this optimism, although uncertainties in the market cannot be entirely discounted.
Frequently Asked Questions (FAQ)
1. How does Morgan Stanley expect housing affordability to improve?
Morgan Stanley predicts that housing affordability will improve primarily due to an increase in inventory and a decline in mortgage rates. As inventory grows and rates decrease, the combination of these factors is expected to enhance affordability for homebuyers.
2. What impact will declining mortgage rates have on home prices?
As mortgage rates decline, home prices are projected to fall slightly next year. Additionally, in real terms, home prices are expected to decrease further as mortgage rates come down. The combination of these factors is anticipated to contribute to improved affordability.
3. Will there be an increase in the number of homes available for sale?
Morgan Stanley’s strategists believe that the path of least resistance is a slight increase in the number of homes available for sale. As mortgage rates trend lower, the likelihood of homeowners listing their homes for sale is expected to rise, resulting in a modest increase in inventory.
4. What are the potential risks to Morgan Stanley’s forecast?
There are two main risks to Morgan Stanley’s forecast for next year. Firstly, if mortgage rates remain high and the economic climate deteriorates, demand could soften, potentially driving home prices down. On the other hand, if demand remains strong and rates remain at around 7%, home prices could rise by 5%, surpassing expectations.
5. Does Morgan Stanley provide a long-term outlook for home prices?
While Morgan Stanley does not provide a specific forecast for home prices in 2025, they anticipate that prices will “outperform” their projections for 2024. This suggests a positive outlook for the housing market beyond the next year, although exact figures are not provided.