October 10, 2023
•
5
min read
Wall Street Analyst at Morgan Stanley gives his view on US home prices
🏦 🐂 Jim Egan Morgan Stanley Housing Strategist, who correctly predicted the resilience that we’ve experienced so far in US home prices, gives his updated view on the impact to housing now that mortgage rates have hit 8%. Morgan Stanley is forecasting lower rates from elevated levels through middle of next year 2024. via Bloomberg Odd Lots. Tracy Alloway, Joe Weisenthal. "Jim Egan on the Impact of an 8% Mortgage Rate" (10/19)
📈 ⬆ Tailwinds: Housing shortage (2 to 6MM), Household formation
📉 🌪 Headwinds: Affordability
👨👩👦 Currently, Marginal demand > Marginal supply of housing
🔊 ⏯ 🔢 Summary: Mortgage rates have surged over the last couple of years. But surprisingly to some, actual home prices in the US have been resilient. This has created a historic shock to affordability. If rates don’t fall soon, it will be difficult for house prices to rise much more given the shock to affordability.
🏡 🌅 That being said, there may be a floor on how far prices can fall, due to a combination of structural and cyclical factors keeping inventory extremely tight.
🔑 💡 The key variable is whether more supply comes onto the market.
1️⃣ The impact of higher rates has been slow
💻 One reason why US house prices have so far resisted the gravitational pull of soaring interest rates is because many homeowners locked-in lower borrowing costs before the Federal Reserve started hiking in its attempt to tame inflation.💵 “The effective rate of mortgages in the United States, the outstanding balance, is somewhere between 3.6%, 3.7%,” says Egan.
💲 “The prevailing rate is approaching 8%. That is a gigantic gap that we haven't seen in decades, over 40 years at this point in time. And so even though it’s eroding … it’s eroding on the margins.”
2️⃣ Deteriorating affordability means lower demand
🏜 While existing homeowners may not feel the impact of higher rates, rising borrowing costs still have a major impact on anyone buying today.
🏝 And as borrowing to buy a home becomes more expensive, it’s inevitably going to cut into demand for housing.
3️⃣ But higher rates could also mean tighter supply
💡 Tepid demand means that you need low supply to help keep house prices afloat.
▶ And of course, this is where the much-discussed lock-in effect comes into play, with people who have cheap mortgages disincentivized to move and helping to keep a tight lid on the number of homes for sale.
4️⃣ Tightness in US housing means consumers may treat their homes differently than before
💸 In the aftermath of the 2007 housing bust, many homeowners simply walked away from their underwater mortgages when they couldn’t make their payments.
🌁 However, in 2023, with house prices still close to their all-time highs and the cost of rents surging, there are signs that Americans are more dedicated to preserving the equity in their homes.
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