2023 has been a rough ride for homebuyers. Exploding interest rates caused many potential buyers to pump the brakes on diving into homeownership.
Morgan Stanley, however, believes that next year is going to be better. According to the firm’s analysts, in 2024, the United States will escape a recession, mortgage rates will decline, salaries will keep rising, and increased listings will encourage more activity in the housing market. All these factors should lead to a drop in the cost of homes.
Analysts noted that while the so-called “lock-in effect” continues to be a significant barrier to more listings, a drop in mortgage rates would make it more likely for a homeowner to offer their house for sale.
“We think we are poised for an affordability improvement that we have only seen a handful of times over the past ~35 years,” Morgan Stanley wrote in a recent note.
“We expect home prices to fall modestly as housing activity picks up versus 2023, with new home sales outpacing existing sales, but think the strong fundamentals of existing homeowners will prevent sizable corrections.”
“As rates come down throughout the year, we expect affordability to improve and for-sale inventory to increase,” they said. “Both developments are constructive for housing activity, but the latter provides a potential counterbalance for home prices.”
The Federal Bank has signaled that it might keep interest rates at record highs for longer than initially thought, with rates projected to remain high in the upcoming months. Morgan Stanley analysts said this might mean purchasers will take advantage of a seven percent mortgage rate in “far greater numbers” than previously predicted. In addition to ongoing supply shortages, this demand may cause home prices to rise five percent in 2024.
On the other hand, housing values could drop more than anticipated. If a recession hits in 2024, there’s a chance that lower consumer demand will cause house values to fall by eight percent.
Morgan Stanley anticipates more robust housing activity in the second half of the year and higher new home sales (up 7.5 percent) over the entire year compared to existing home sales (up 2.5 percent).
According to the estimate, single-unit starts will rise by 10 percent in 2024 to reach around 975,000 by the end of the year, in line with the growth in new home sales.
As the rise in inventory counteracts the increase in demand, home prices should see slight drops. The letter stated, “Homeowners are still in a strong position, and while we don’t anticipate a significant decline in prices, we believe that they will fall by three percent by 2024.”
Given the “trajectory of both the economy and mortgage rates,” Morgan Stanley analysts predicted that home values will be significantly lower in 2025, though they did not provide a particular figure.
However, demand may weaken even more in 2024 if interest rates stay high or the country enters a recession.
“Although we do not think that distressed transactions, including defaults and foreclosures, will rise dramatically during this cycle, particularly not in 2024, any increases in supply into a weaker demand environment will probably impact prices.”
