Morgan Stanley: 2024 housing market is 'poised for an improvement in affordability that we have only seen a handful of times over the past ~35'

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Morgan Stanley analysts sent out a new 59-page report to investors, detailing their views on the U.S. economy, housing market, and bond market in 2024.

Next year, Morgan Stanley analysts believe that the U.S. economy will avoid a recession, incomes will continue to rise, mortgage rates will decrease slightly*, and U.S. housing activity will pick up a little. Despite lower rates (they expect the 10-year Treasury yield to end 2024 at 3.95%) and a still resilient economy, Morgan Stanley also believes that U.S. home prices will fall by -3% in 2024.

There are three levers to improve housing affordability: falling mortgage rates, rising incomes, or falling house prices. Morgan Stanley believes all three will be pulled a little in 2024, and taken together, this would create a significant improvement in housing affordability.

“We think we are poised for an improvement in affordability that we have only seen a handful of times over the past ~35 years,” wrote Morgan Stanley analysts. “We expect [national] 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 [home price] corrections.”

Through August, U.S. home prices as measured by the Case-Shiller National House Price Index are up +5.8% year-to-date despite mortgage rates sitting at 22-year highs. That raises the question: How can Morgan Stanley predict that both U.S. home prices and mortgage rates will fall together in 2024?

Here’s how Morgan Stanley analysts explained the logic: “The immediate response in the [housing] market [to spiked mortgage rates] has been renewed decreases in inventory, which we think provide near-term support for home prices. As rates come down throughout the year, we would expect affordability to improve and for-sale inventory to increase. Both of these developments are constructive for housing activity, but the latter provides a potential counterbalance for home prices. We expect housing activity to be stronger in the 2nd half of the year and new home sales to increase more than existing home sales over the course of the full year (+7.5% vs. +2.5%), while single- unit starts follow new home sales higher and print small gains as well (+10%). Home prices should see modest declines as the growth in inventory offsets the increased demand. Homeowners remain strong hands, and we don't expect any sizable correction in prices, but we do think they will be down 3% in 2024.”

In addition to a “base” case, Morgan Stanley also released “bear” and “bull” cases.

Morgan Stanley’s base case: -3% U.S. home prices in 2024

“We believe that lower mortgage rates will simultaneously spur demand as well as an increased volume of listings. While the first could exert upward pressure on home prices, the latter is a headwind. In our view, the transition off of historic lows from a listings perspective will lead prices down YoY in 2024 despite the increases in transaction volumes that we are forecasting. However, we expect those decreases to be minimal. As we have already mentioned, homeowners remain strong hands. 98.4% of the conventional mortgage market has a mortgage rate below 7%. 93% has a mortgage rate below 6%. 74% has a mortgage rate below 4%. As [national] home prices start to decrease, we expect inventory increases to moderate to reflect the fact that these homeowners do not need to sell. Ultimately, we expect home prices to fall 3% in 2024. Given the trajectory of both the economy and mortgage rates, we would expect 2025 home prices to outperform this 2024 projection” wrote Morgan Stanley analysts.

Morgan Stanley’s bull case: +5% U.S. home prices in 2024

“With so many housing statistics at levels we have rarely seen over the past several decades, it isn't hard to envision housing activity and home prices evolving differently from what we have laid out above. As mortgage rates come down, affordability will remain under substantial pressure. However, a consumer that has recently seen mortgage rates above 8% might jump at the chance to lock in 6.5% or 7% mortgages in far greater numbers than we are expecting. If demand increases more than we are expecting into a supply environment that remains constrained, we envision home prices climbing a further 5% next year to a new record high” wrote Morgan Stanley analysts.

Morgan Stanley’s bear case: -8% U.S. home prices in 2024

“On the other hand, if rates remain elevated or the economy slips into a recession, demand could soften further in 2024. While we do not believe that defaults and foreclosures—and thus distressed transactions—will increase significantly in this cycle, and especially not in 2024, any increases in supply into a weaker demand environment will likely weigh on prices. Older homeowners or any capitulation from households that have simply lived in their homes longer than they originally anticipated would likely drive prices down in excess of our forecast. Our bear case for a decline in home prices in 2024 is -8%” wrote Morgan Stanley analysts.

Most housing analysts still expect U.S. house prices to rise a modest single-digit amount in 2024. That includes 2024 forecasts by the Mortgage Bankers Association (+4.1%), Fannie Mae (+2.4%), Wells Fargo (+2.5%) Goldman Sachs (+0.6%) and the AEI Housing Center (+4%). CoreLogic’s forecast model expects U.S. home prices to rise +2.6% from September 2023 to September 2024. Zillow predicts national home prices will remain flat next year (-0.1% between Oct. 2023 and Oct. 2024), while the latest forecast by Moody’s Analytics (-4.4% between Q4 2023 and Q4 2024) is closer aligned with Morgan Stanley’s 2024 forecast (-3%).

IF U.S. home prices do fall in 2024, it’s possible that many regional housing markets could still post positive house price gains. Just as this year, which will see a positive year-over-year jump, will also witness home prices falling year-over-year in several regional housing markets like Austin, New Orleans, and San Antonio.

*Other than expressing the expectation of mortgage rates coming down a bit in 2024, Morgan Stanley did not provide a concrete mortgage rate forecast. They did mention anticipating the 10-year Treasury yield to conclude 2024 at 3.95%. Based on today’s spread (296 bps) between the 10-year Treasury yield and the 30-year fixed mortgage, that would result in a 6.91% mortgage rate by the end of 2024. If the spread narrowed, it’d be even lower.

Here’s a round up of some of the latest 2024 mortgage rate forecasts 👇