Morgan Stanley cuts US housing market outlook — where it predicts house prices to correct in 2023

On a nationwide basis, home prices fell 1.3% between June and August. That marked the first decline as measured by lag. Case-Shiller National House Price Index since 2012.

It’s not just a small drop, it’s a shift in trajectory. At least that is according to the latest forecast released by the economic group at Morgan Stanley.

This year, Morgan Stanley expects home prices in the US, as measured by the Case-Shiller Index, to end up 4% year-over-year. But considering that the Case-Shiller Index rose 8.9% in the first six months of 2022, that means Morgan Stanley predicts a drop in U.S. home prices by about 5% — including a 1. 3% from June to August — in the second half of 2022.

The house price adjustment won’t stop there. Morgan Stanley expects home prices in the US, as measured by the Case-Shiller Index, to fall another 4% in 2023. In total, the Wall Street bank expects home prices to fall about 10% over the period. from June 2022 to the bottom in 2024. (Formerly , Morgan Stanley has predicted a peak-to-trough drop of 7% in US house prices).

The most recent housing adjustment, which caused home prices in the US to drop 27% from 2006 to 2012, was driven primarily by high unemployment, “under pressure” affordability, and opaque mortgage products. darkness and oversupply. This time around, we only have what Luck call ability to pay “pressure”: Vanity house prices with mortgage interest rates skyrocketing.

“The median price of existing home sales has increased by 38% since March 2020. Mortgage interest rates are up more than 300 basis points. [3 percentage points] In the past eight months, we’ve seen anything like it for the first time since 1980/81. “The combination of the two has led to a faster decline in affordability than any other point in our time series,” the Morgan Stanley researchers wrote.

According to the bank, in the future, the three levers can help “lower pressure” on solvency. First, if inflation falls and financial conditions ease, that should, in theory, push mortgage rates lower and thus improve affordability. Second, income increases (is 4.4% increase over the same period last year) can improve affordability. Third, continued decline in house prices will help “lower pressure” on affordability. As long as affordability remains “under pressure,” Morgan Stanley expects third leverage to be pulled.

“Up to this point, we have focused on housing projections through the end of 2023, but we do not believe December 2023 will be the bottom of house prices. “It’s not a groundbreaking statement to say that the trajectory of home prices into 2024 and beyond contains more than a little uncertainty,” the researchers wrote.

Let’s take a closer look at Morgan Stanley’s latest housing outlook.

Scarce inventory won’t stop home prices from falling — but it could create a floor

The ongoing affordability shock—of soaring home prices coupled with skyrocketing mortgage rates—has seen demand deepen. On an annual basis, Mortgage applications down 40.7%. However, it does not translate into increased supply: Inventory levels in October are 37.6% lower than October 2019 levels.

“Condition provides argument in history [for] House prices escalate from here. If we have a total supply of less than 6 months, annual home price growth has never been negative in the next six months since the start of this Case-Shiller Index in the late 1980s. Morgan researchers Stanley writes.

But this time could be different: Ongoing affordability stress could drive home prices down even though inventory remains scarce. (This is Moody’s Analytics outlook for the nation’s 322 largest markets.)

Morgan Stanley writes: “The fact that we expect home prices to begin to decline year-on-year in March 2023 despite scarce inventories reflects this unprecedented state of affordability in the U.S. housing market. Ky”. “However, while supply has not kept home price growth at zero, we believe it prevents the home price decline from becoming too large.”

cow case: House prices stop falling in 2023

From peak to trough, Morgan Stanley expects US home prices to fall 10% through 2024. However, there is a “bullish” case as the company believes US home prices won’t fall into 2023. and a peak to trough drop will occur in 2023. round 5%.

There are two main pillars to Morgan Stanley’s “bullish” case: Tighter-than-expected inventory levels and lower-than-expected mortgage rates.

“In the event of a price increase, the lock-in effect keeps inventories at the low levels we’ve experienced over the past year. At the same time, lower mortgage rates encourage more buying demand than we currently expect because households see any recovery as a temporary possibility, the Morgan Stanley researchers wrote.

In 2023, Morgan Stanley expects 30-year fixed mortgage interest rate average 6.2%. However, if the Fed successfully controls inflation earlier than expected, loosening financial conditions could send mortgage rates below 6%. Meanwhile, if so-called lock effect (meaning homeowners unwilling to sell and forego 2% or 3% mortgage interest) continues through 2023, which could lead to tighter inventory levels than Morgan Stanley is currently expecting.

bear caseHouse price down 20%

If a “deep” recession hits, Morgan Stanley predicts U.S. home prices could fall 20% from peak to trough — including a home price decline of up to 8% in 2023 alone.

“A common scenario we encounter when discussing a home price decline is a prolonged and deeper recession leading to a substantial increase in unemployment,” the Morgan Stanley researchers wrote. “What we think will be a more likely cause of home price decline will be a cross between weaker-than-expected demand and more inventory build-up than currently forecast. .”

But even if this “bear” scenario emerges, Morgan Stanley doesn’t think it will completely repeat the 2008 crash.

“While this [our bear case] interpretable as negative for the housing market, we continue to believe that the health of credit standards that will keep the ceiling on transaction difficulty may actually increase. Additionally, a mortgage service industry that is more engaged in providing borrowers with alternatives to foreclosure (e.g., amendment) would keep more borrowers at home. rather than being forced into liquidation,” the Morgan Stanley researchers wrote.

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