Our co-heads of Securitized Products Research, James Egan and Jay
Bacow, explain how the increase in home prices, a tight market
supply and steady mortgage rates are affecting home sales.
----- Transcript -----
James Egan: Welcome to Thoughts on the
Market. I'm Jim Egan, co-head of Securitized Products Research at
Morgan Stanley.
Jay Bacow: And I'm Jay Bacow, the other
co-head of Securitized Products Research at Morgan Stanley.
Today, a look at the latest trends in the mortgage and housing
market.
It's Wednesday, February 19th, at 11am in New York.
Now, Jim, there's been a lot of headlines to kick off the year.
How is the housing market looking here? Mortgage rates are about
80 basis points higher than the local lows in September. That
can't be helping affordability very much.
James Egan: No, it is not helping
affordability. But let's zoom out a little bit here when talking
about affordability. The monthly payment on the medium-priced
home had fallen about $225 from the fourth quarter of 2023 to
local troughs in September. About a 10 percent decrease. Since
that low, the payment has increased about $150; so, it's given
back most of its gains.
Importantly, affordability is a three-pronged equation. It's not
just that payment. Home prices, mortgage rates, and incomes. And
incomes are up about 5 percent over the past year. So,
affordability has improved more than those numbers would suggest,
but those improvements have certainly been muted as a result of
this recent rate move.
Jay Bacow: Alright. Affordability is up,
then it’s down. It’s wrong, then it’s right. It sounds like a
Katy Perry song. So, how have home sales evolved through this
rollercoaster?
James Egan: Well, you and I came on this
podcast several times last year to talk about the fact that home
sales volumes weren't really increasing despite the improvement
in affordability. One point that we made over and over again was
that it normally takes 9 to 12 months for sales volumes to
increase when you get this kind of affordability improvement. And
that would make the fourth quarter of 2024 the potential
inflection point that we were looking for. And despite this move
in mortgage rates, that does appear to have been the case.
Existing home sales had a very strong finish to last year. And in
the fourth quarter, they were up 8 percent versus the fourth
quarter of 2023. That's the first year-over-year increase since
the second quarter of 2021.
Jay Bacow: All right. So that's pretty
meaningful. And if looking backward, home sales seem to be
inflecting, what does that mean for 2025?
James Egan: So, there's a number of
different considerations there. For one thing, supply – the
number of homes that are actually for sale – is still very tight,
but it is increasing. It may sound a little too simplistic, but
there do need to be homes for sale for homes to sell, and
listings have reacted faster than sales. That strong fourth
quarter in existing home sales that I just mentioned, that
brought total sales volumes for the year to 1 percent above their
2023 levels. For sale inventory finished the year up 14 percent.
Jay Bacow: Alright, that makes sense. So,
more people are willing to sell their home, which means there's a
little bit more transaction volume. But is that good for home
prices?
James Egan: Not exactly. And it is those
higher listings and our expectation that listings are going to
continue to climb that's been the main factor behind our call for
home price growth to continue to slow. Ultimately, we think that
you see home sales up in the context of about 5 percent in 2025
versus 2024.
Our leading indicators of demand have softened, a little, in
December and January, which may be a result of this sharp
increase in rates. But ultimately, when we look at turnover in
the housing market, and we're talking about existing sales as a
share of the outstanding homes in the U.S. housing market, we
think that we're kind of at the basement right now. If we're
wrong in our sales volume call, I would think it's more likely
that there are more sales than we think. Not less.
Jay Bacow: Let me ask you another easy
question. How far would rates have to fall to really incentivize
more supply and/or demand in the housing market?
James Egan: That's the $45 trillion
question. We think the current housing market presents a
fascinating case study in behavioral economics. Even if mortgage
rates were to decline to 4.5 percent, only 35 percent of people
would be in the money. And that's still over 200 basis points
from where we are today.
That being said, we think it's unlikely that mortgage rates need
to fall all the way to that level to unlock the housing market.
While the lack of any historical precedent makes it difficult for
us to identify a specific threshold at which activity could
increase meaningfully, we recently turned to Morgan Stanley's
AlphaWise to conduct a consumer pulse survey to get a better
sense of how people were feeling about their housing options.
Jay Bacow: I like data. How are those
people feeling?
James Egan: All right, so 31 percent of
people anticipate buying a home over the next two years, and
almost half are considering buying over the next five.
Interestingly, only 21 percent are considering selling their home
over the next two years. In other words, perceived demand is
about 50 percent greater than marginal supply, at least in the
immediate future, which we think could be a representation of
that lock-in effect.
Current homeowners’ expectations of near-term listings are
depressed because of how low their mortgage rate is. But we did
ask: What if mortgage rates were to fall from 6.8 percent today
to 5. 5 percent? In that world, 85 to 90 percent of the people
planning to buy a home in the next two years stated that they
would be more likely to execute on that purchase.
So, we think it's safe to say that a decline in mortgage rates
could accelerate purchase decisions. But Jay, are we going to see
that decline?
Jay Bacow: Well, our interest rate
strategists do think that rates are going to rally from here.
They've updated their 10-year forecast to expect the tenure note
ends 2025 at 4 percent. If the tenure note's at 4 percent,
mortgage rate should come down from here, but not to that 4.5
percent, or probably even that 5.5 percent level that you quoted.
You know, honestly, you don't really want to stay, you don't
really want to go. We're probably talking about like a 6 percent
mortgage rate. Not quite that level.
But Jim, this is a national level, a national mortgage rate, and
housing markets about location and location and location. Are
there geographical nuances to your forecast?
James Egan: People all over the country are
asking, should they stay or should they go now, and that answer
is different depending on where you live, right? If you look at
the top 100 MSAs in the country, 8 of the top 11 markets showing
the largest increases in inventory over the past year can be
found in Florida.
So, we would expect Florida to be a little bit softer than our
national numbers. On the other hand, inventory growth has been
most subdued in the Northeast and the Midwest, with several
markets continuing to see inventory declines.
Jay Bacow: All right, well selfishly, as
somebody that lives in the Northeast, I am a little bit happy to
hear that. But otherwise, Jim, it's always a pleasure listening
to you.
James Egan: Pleasure talking to you too,
Jay. Thanks for listening, and if you enjoy this podcast, please
leave us a review wherever you listen and share Thoughts on the
Market with a friend or colleague today.
DISCLAIMER
Jay Bacow: So, Jim, the lock-in effect is:
You don’t really want to stay. No. But you don’t really want to
go.
James Egan: That is exactly; that is
perfect! Wow. That is the whole issue with the housing market.
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