In a recent analysis, Morgan Stanley has revealed that home prices could experience a significant drop of up to 5% in the coming year if mortgage rates remain at their current 8% level. The bank's strategists pointed to the recent surge in mortgage rates, with the average 30-year fixed rate reaching a two-decade high. This rise in rates has led to concerns about the impact on the housing market and affordability.
The surge in mortgage rates is the highest cost of borrowing that mortgage applicants have faced since the year 2000. This situation is expected to worsen affordability conditions over the short term. Mortgage rates at these levels could potentially lead to home prices remaining flat by the end of the year, according to Morgan Stanley's base-case forecast. However, if these high rates persist, it could have a more significant impact on demand and subsequently on home prices.
Morgan Stanley strategists suggest that even a 5% increase in housing inventory in the coming year could lead to a 5% drop in home prices by December 2024, provided there is no increase in sales. The rising mortgage rates in 2022 and 2023 had already sidelined many buyers and sellers from the housing market, leading to a shortage of available supply and driving up home prices. However, if high rates persist, they may reverse this trend.
The Shift in Morgan Stanley's Housing Market Predictions
Morgan Stanley analysts had previously expected national home prices to fall by 4% in 2023. This pessimistic forecast was made as the housing market faced challenges. However, in a recent research note, they made a significant change to their predictions, now suggesting that housing prices could rise by up to 5% for the year. This shift is attributed to the continuous rise in mortgage rates, which reached 8%, the highest level in over two decades.
The surge in mortgage rates, coupled with the record growth in home prices during the pandemic, has created an unaffordable housing market, unlike anything seen in decades. Affordability has declined significantly, with the monthly payment on a median-priced home increasing by 27% over the past year. If calculated using the current 8% rate, this increase jumps to 38%. The result is the most severe affordability deterioration seen in decades.
The housing market is already underbuilt, and the surge in mortgage rates has led to a retreat in supply. Existing home listings hit a new low in August, while homebuilder confidence has also taken a hit due to rising mortgage rates. This could result in fewer homes being built. However, the impact on home sales is expected to be less severe than in the previous year, although it will put upward pressure on home prices in the short term.
Other Financial Institutions' Predictions About Home Prices
Morgan Stanley isn't the only financial institution with predictions about home prices. Roger Ashworth, a managing director at Goldman Sachs, suggests that despite affordability challenges, the housing market is in a relatively strong position due to a low supply of homes for sale.
He predicts a slow but steady rise in home prices, with a 1.8% increase by the end of this year and a 3.5% increase by the end of 2024. Mark Fleming, chief economist at First American, also believes that 8% mortgage rates may continue or hover around that level throughout the end of this year.
Top Factors Contributing to the Pessimistic Housing Market Forecast for 2024
Rising Interest Rates
One of the key factors behind the pessimistic housing market forecast is the continuous increase in interest rates. The Federal Reserve has been raising its benchmark rate, affecting the cost of borrowing for mortgages and other loans. Higher interest rates make it more challenging for potential buyers to afford their monthly payments and reduce their purchasing power.
Tighter Lending Standards
Banks and other lenders have become more cautious about their lending practices, especially in the wake of the subprime mortgage crisis in 2008. They now require higher credit scores, larger down payments, and more documentation from borrowers. These stricter lending standards limit the pool of eligible buyers, making it more difficult for many to secure financing for a home.
The housing market is currently grappling with a significant supply-demand imbalance. On one hand, there is a shortage of new construction, particularly in the affordable segment of the market. On the other hand, there is an excess of existing homes, particularly in the high-end segment. This imbalance results in a situation where buyers have fewer options, while sellers must lower their prices to attract buyers.
Economic uncertainty on a global scale is another factor contributing to the pessimistic forecast for the housing market. Factors such as trade tensions, geopolitical risks, and slowing economic growth create instability and unpredictability in financial markets. This, in turn, affects consumer confidence and spending. Uncertainty about income and job prospects may cause potential buyers to delay or cancel their plans to purchase a home.