The housing market is heading for the affordability of 2 years ago, Morgan Stanley says. Here’s why its home price forecast is unchanged—a drop
Morgan Stanley’s home price outlook is unchanged, but it does see something new in affordability, after a painful year for most homebuyers, as mortgage rates bit in a way they haven’t since the 1980s. James Egan, the bank’s co-head of U.S. securities products research, crunched the data on mortgage rates falling from their recent 8% peak to the 6% range, and sees affordability improving as early as next month to a point unseen since February 2021, which was less than halfway through the pandemic housing boom.
This is needed since “home prices have once again broken through to a new record high,” the note said. Egan and his team cited data showing October’s year-over-year increase of 4.8%. The catch, they say, is that mortgage rates decreased more than 50 basis points in December and close to 70 basis points the prior month. The average 30-year fixed mortgage rate is sitting at 6.8%—much lower than October’s 23-year high, but more than double the 3% range that put a floor under the pandemic era housing boom.
Mortgage rates will also support Morgan Stanley’s forecast from November, which sees prices mildly declining through 2024. “While home prices continue to climb, as these lower rates filter through our affordability calculations the pace of deterioration has slowed to its most benign levels since 2Q21,” the bank’s strategists wrote. “If rates were to hold at these levels, [year-over-year] affordability could improve as soon as next month—which would be the first time this has been the case since February 2021.
“It is our expectation of increases here that has us continuing to expect a mild decrease in home prices in 2024 despite improved affordability and the growth in sales,” the strategists wrote. In late November, the investment bank forecast a 3% drop in nationwide home prices through this year.
If current mortgage rates were to hold, the strategists added, the monthly mortgage payment on a median-priced home would be $185 lower than Morgan Stanley’s existing metric. That would bring the average monthly payment to its lowest level since April. Nonetheless, affordability has already improved some.
The bank found that pending home sales and mortgage purchase applications “remain soft, but the pace of their decline has moderated significantly,” the note read, citing a 15% year-over-year decline in purchases application and a 5% decline in pending home sales last month. But the investment bank predicts sales to increase this year, particularly existing-home sales, which should jump 2.5% year over year, and new-home sales, 7.5%.
“While a faster improvement in affordability than we expected introduces upside risk to our forecasts…we expect the absolute levels of affordability and inventory to keep growth from accelerating too quickly,” they wrote.
Existing-home sales retreated to their slowest pace in more than a decade—largely a result of the lock-in effect, which refers to homeowners refusing to sell their homes for fear of losing their low mortgage rates. More than 90% of conventional borrowers have a mortgage rate less than or equal to 6%; nearly 87% have a rate less than or equal to 5%; almost 75% have a rate less than or equal to 4%, according to Morgan Stanley.
However, the lock-in effect seems to be showing signs of easing, as existing-home sales rose in November after five consecutive monthly declines. They’re still down more than 7% on an annual basis, and new home sales are only up more than 1% year over year. But it is expected that supply will increase this year. For-sale inventory was “virtually unchanged,” in December, following seven consecutive months of declines. Months of supply, which refers to the number of months it would take for all the current homes for sale on the market to sell, has also increased to its highest level since May 2020, the note said.
