Morgan Stanley: Housing market poised for historic improvement in 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,” strategists, led by Jay Bacow and James Egan, wrote in the note. 

This requires a big to be sure, since the investment bank is still only forecasting a 3% drop in nationwide home prices through next year. The combination of other factors is crucial, though. 

Morgan Stanley’s strategists see relief primarily coming from inventory, which has been tight in recent months, to say the least, and from mortgage rates. They see mortgage rates coming down throughout next year, and with that, they “expect affordability to improve and for-sale inventory to increase.”

In other words, as mortgage rates drop, new home sales and existing home sales should increase, and single-unit starts should trend higher. Also, home prices should fall slightly next year as the “growth in inventory offsets the increased demand.”  But home prices will fall even more in real terms as mortgage rates come down.

It’s important to note that while they expect new home sales to continue to outperform existing home sales, the general increase in sales will drive housing starts—their forecast is that single-unit housing starts will climb by roughly 10% next year. 

In terms of home prices, that’s not a sizable correction, in their words, so homeowners will continue to hold the power in the market, but it could provide some relief. It’s clearly better for would-be buyers than if home prices were to rise, but also indicative of a larger push-and-pull…