Morgan Stanley expects home prices to dip next year

Dani Romero
·Reporter
3 min read
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In this article:

U.S. home prices will decline next year as higher mortgage rates pressure home prices across the country's top markets, Morgan Stanley analysts predicted.

“While we do not see a material correction in home prices, we now think that YoY [year-over-year] home price growth will turn negative in the first half of next year before finishing 2023 at -3%,” Morgan Stanley’s James Egan and his U.S. housing research team wrote in a note this week.

“While this is 7% below where prices are today, it also only brings prices back to January 2022 levels,” which is 32% above where home prices were in March 2020.

PEARLAND, TEXAS - SEPTEMBER 15: In an aerial view, homes are seen in a residential neighborhood on September 15, 2022 in Pearland, Texas. Mortgage rates continue climbing around the country reaching 6 percent this week, for the first time since the 2008 financial crisis. (Photo by Brandon Bell/Getty Images)
In an aerial view, homes are seen in a residential neighborhood on September 15, 2022 in Pearland, Texas. Mortgage rates continue climbing around the country reaching 6 percent this week, for the first time since the 2008 financial crisis. (Photo by Brandon Bell/Getty Images) (Brandon Bell via Getty Images)

Home prices are still rising now, while the pace for growth has slowed. The national measure of prices rose 15.8% in July, down from an 18.1% annual rate the prior month, the S&P CoreLogic Case-Shiller index showed Tuesday.

“In order for YoY [year-over-year] price growth to decelerate to our prior forecast of +9% in December 2022 and +3% in December 2023, we were going to need these monthly declines in home prices. We just expected them to start in September, maybe August,” Egan wrote.

Other data shows the increase in borrowing costs has made homeownership far less affordable. Existing-home sales have fallen for the seventh consecutive month through August, according to the National Association of Realtors’ housing affordability index.

The median existing-home price in August came in at $389,500, a 7.7% jump from a year ago, when the median listing price was $361,500 in 2021. At the same time, the 30-year fixed-rate mortgage hit 6.70% this week, sending some would-be buyers into a frenzy while others backed out of contract signings.

Affordability is deteriorating at a much faster pace than at any point in at least 30 years
Affordability is deteriorating at a much faster pace than at any point in at least 30 years (Source: NAR, Freddie Mac, Morgan Stanley Research)

“Affordability is deteriorating faster than at any point in our data history,” Egan added. “If we assume a 7% mortgage rate, affordability looks materially worse than today. And the pace of its deceleration has already more than doubled compared to almost any time in history.”

According to Egan, sales are “flat to down” for the first 12 to 18 months when affordability decreases before it gets better. However, that’s not always the case.

“The notable exception is the [Great Financial Crisis], where the drop in sales accelerated after 18 months and would continue for over three years. Sales are falling faster today than they did during the GFC,” Egan noted.

The Inventory Single-family homes slower than it has been in at least 40 years
The Inventory Single-family homes slower than it has been in at least 40 years (Source: NAR, Freddie Mac, Morgan Stanley Research)

A major contributing factor is the lack of inventory in the market. There aren’t enough homes to buy. While progress has been made, it is still “less than half of where it was in the years” before the financial crisis, Egan noted.

Egan and his housing research team estimate the pace of sales will drop and “continue outpacing the GFC for approximately another year before more generous comps and the impact of the Fed being on hold for several months shallow out the drop in sales volumes.”

Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv

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