On a national basis, house prices fell 1.3% from June to August.This marked the first decline measured by latecomers Case-Shiller National Home Price Index Since 2012.
It’s not just a small dip, it’s a change in trajectory. At least, according to the latest projections made by the economics team, Morgan Stanley.
This year, Morgan Stanley expects US home prices, as measured by the Case-Shiller index, to end the year up 4%. However, given that the Case-Shiller Index rose 8.9% in the first six months of 2022, Morgan Stanley expects U.S. house prices to rise in the second half of the year, including a 1.3% decline from June to August. means that we expect to fall about 5%. 2022.
of house price correction That’s not all. Morgan Stanley expects US house prices, as measured by the Case-Shiller index, to fall another 4% in 2023. In total, Wall Street banks expect home prices to fall about 10% between his June 2022 and his 2024 trough. , Morgan Stanley had predicted a 7% peak-to-trough drop at US house prices).
The last housing correction, which saw US home prices fall 27% between 2006 and 2012, was fueled by high unemployment, “squeezed” affordability, dubious mortgage products and oversupply. This time, luck call “Squeezed” Affordability: bubbled house prices Coupled with skyrocketing mortgage rates.
“Median existing home sales are up 38% since March 2020. Mortgage rates are up more than 300 bps. [3 percentage points] In the last 8 months I have seen such a thing for the first time since 1980/81. His combination of the two caused affordability to deteriorate faster than at any point in time,” the Morgan Stanley researchers wrote.
Going forward, three levers could help “soften” affordability, according to the bank. First, slower inflation and easier financial conditions would theoretically lower mortgage rates and increase mortgage availability.Second, an increase in income (which 4.4% YoY increase) can improve affordability. Third, continued home price declines will help “ease” affordability. As long as affordability remains ‘pressured’, Morgan Stanley expects the third lever to be pulled.
“Up to this point, our focus has been on housing forecasts through the end of 2023, but we do not believe that December 2023 will be the bottom for house prices. To say it’s full of certainty is not a groundbreaking statement,” the researchers wrote.
Let’s take a closer look at Morgan Stanley’s latest housing outlook.
Tight inventories won’t stop home prices from falling, but could make a bottom
The continued affordability shock of bubbled house prices and soaring mortgage rates has dampened demand. year-on-year, Mortgage purchase applications down 40.7%However, it has not led to a surge in supply levels. October inventory levels are 37.6% below October 2019 levels.
“Supply conditions have historically claimed [for] Home prices will rise from here. If total supply is below his six months, then this case in the six months since his Shiller index started in the late 1980s, annual house price growth has never been negative. Currently, the supply is only 3.9 months old,” the Morgan Stanley researcher wrote.
But this time it could be different. Even with tighter inventories, continued affordability tensions could push home prices down.
Morgan Stanley said, “Despite tight inventories, the fact that home prices are expected to start falling annually in March 2023 is a testament to how affordable this situation is in the U.S. housing market. “But while supply cannot keep house price growth at zero, we believe it has prevented house price declines from becoming too great.”
bull case: Home prices will stop falling in 2023
Morgan Stanley expects US home prices to fall 10% by 2024. However, there is a ‘bullish’ case the firm believes US house prices won’t fall in 2023 and will begin peak-to-trough decline. about 5%.
Morgan Stanley’s ‘bullish’ scenario has two key pillars. Inventory levels are tighter than expected and mortgage rates are lower than expected.
“In the bullish case, the lock-in effect keeps inventories at the lows experienced over the past year. , will stimulate more buying demand than is currently expected, giving it time to move in its favor before the next rally,” Morgan Stanley researchers wrote.
In 2023, Morgan Stanley will 30 year fixed mortgage rate 6.2% on average. However, if the Fed manages to keep inflation in check sooner than expected, loosening financial conditions could push mortgage rates below his 6% mark.On the other hand, if so-called lock-in effect (which means homeowners are unwilling to sell and give up 2% or 3% of their mortgages) into 2023 than Morgan Stanley currently expects. Inventory levels can be tight.
bear case: Home prices plummeted by 20%
Morgan Stanley predicts that US house prices could crash by 20% from peak to trough if a “deep” recession materializes. This includes home price declines of up to 8% in 2023 alone.
A Morgan Stanley researcher wrote, “The common scenario presented when discussing a bearish house price case is a longer and deeper recession leading to a significant increase in unemployment.” . “We believe lower house prices are likely to come from the intersection of weaker-than-expected demand and significantly higher inventories than currently forecast,” he said.
But even if this “bearish” scenario materializes, Morgan Stanley does not expect a full-scale repeat of the 2008 crash.
“The other day [our bear case] Unsurprisingly, this could be negative for the housing market, but we continue to believe that the strength of credit standards should keep the upper bound on how much true distressed deals will rise. . Additionally, the mortgage services industry, much more accustomed to offering borrowers alternatives to foreclosure (such as modification), should keep more borrowers at home rather than force liquidation events. ,” writes Morgan, his Stanley researcher.
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