- Housing analysts at Morgan Stanley believe that house prices will remain approximately the same at the end of 2023
- But until next year, they predict that if mortgage rates remain high, prices will fall
- High mortgage rates will reduce inventories and demand in the short term
Analysts at Morgan Stanley have predicted that house prices could fall by as much as 5 percent by the end of 2024 if record high mortgage rates of 8 percent continue.
In a research note published Tuesday, the housing analysts suggested that high interest rates could cause home prices to remain flat or rise slightly through the end of this year, before eventually falling 5 percent next year.
That’s because high rates would cause both demand and supply to fall in the short run, but low demand would outpace low inventory in the longer run.
In the note, they suggested that high rates would both reduce inventory in the short term and take potential buyers out of the market. These two phenomena would roughly cancel each other out, they argued, meaning that house prices could remain stable or rise slightly in the coming months.
“In the short term, we believe that the impact of a further decline in the supply of homes for sale will have a greater impact on house prices than any decline in demand,” the report said.
Morgan Stanley housing strategist and research note author James Egan (pictured) said a 5 percent increase in housing stock next year could push prices down by 5 percent
Housing analysts at Morgan Stanley suggested that high interest rates could cause home prices to remain flat or rise slightly through the end of this year, before eventually falling by as much as 5 percent by the end of next year.
“These dynamics will result in house prices ending the year between our base case of 0 percent and a bull case of +5 percent,” it said.
But in the longer term, into the new year, analysts suggested that prolonged low demand could outweigh short supplies, pushing prices lower.
“If mortgage rates were to remain near 8 percent, the headwinds this would mean to demand could have a more negative impact on house prices,” the report said.
Furthermore, they suggested that the stock will likely eventually rise again from the current low, increasing supply and further reducing costs.
“In our view, even 5 percent inventory growth next year would produce a 5 percent decline in home prices by December 2024,” the report continued.
Appears on Bloomberg’s Odd Lots podcast this week, James Egan, Morgan Stanley housing strategist and author of the research note, said: ‘Just a 5 percent increase (in inventory), if we assume no growth in sales or no growth in transaction volumes, our models would say that house prices will have fallen by 5 percent by the end of next year.’
The authors of the note reported that Morgan Stanley expects mortgage rates to fall again with interest rates next year. The photo shows Morgan Stanley’s headquarters in New York
However, Egan made it clear that the bank’s basic forecast is that mortgage rates will not remain as high as they are now for long.
“That’s not our forecast, as I said, higher for longer is not our base case, and an 8 percent mortgage rate for all of next year is not our base case,” he said.
The authors of the note reported that Morgan Stanley expects mortgage rates to fall again with interest rates next year.
“We emphasize that (higher rates for longer periods of time) is not our base case. Our interest rate strategy team expects that the yield on ten-year government bonds will fall to 3.9 percent by the middle of next year, and that in that scenario mortgage rates will also fall from this level.’