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- [00:01]
A
Welcome to Thoughts on the Market. I'm Jim Egan, co head of securitized products research at Morgan Stanley.
- [00:06]
B
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.
- [00:32]
A
No, it is not helping affordability, but let's zoom out a little bit here when talking about affordability. The monthly payment on the median priced home had fallen about $225 from the fourth quarter of 2023 to local troughs in September, about a 10% 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, incomes. Incomes are up about 5% over the past year. Affordability has improved more than those numbers would suggest. But those improvements have certainly been muted as a result of this recent rate move.
- [01:16]
B
Affordability's up, then it's down. It's wrong, then it's right. It sounds like a Katy Perry song. How have home sales evolved through this rollercoaster?
- [01:25]
A
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 nine 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% versus the fourth quarter of 2023. That's the first year over year increase since the second quarter of 2021.
- [02:06]
B
All right, so that's pretty meaningful. If looking backward, home sales seem to be inflecting. What does that mean for 2025?
- [02:13]
A
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% above their 2023 levels for sale inventory finished the year up 14%.
- [02:42]
B
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?
- [02:51]
A
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% 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 US 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.
- [03:33]
B
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?
- [03:41]
A
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%, only 35% 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.
- [04:17]
B
I like data. How are those people feeling?
- [04:20]
A
All right, so 31% of people anticipate buying a home over the next two years, and almost half are considering buying over the next five. Interestingly, only 21% are considering selling their home over the next two years. In other words, the perceived demand is about 50% 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% today to 5.5%? In that world, 85 to 90% 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. We think it's safe to say that a decline in mortgage rates could accelerate purchase decisions. Jay, are we going to see that decline?
- [05:12]
B
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 10 year note ends 2025 at 4%. If the 10 year note's at 4%, mortgage rates should come down from here, but not to that 4.5% or probably even that 5.5% level that you quoted. Honestly, you don't really want to stay. You don't really want to go. We're probably talking about a 6% 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?
- [05:50]
A
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. If you look at the top 100 MSAs in the country, eight 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.
- [06:17]
B
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.
- [06:27]
A
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. The proceeding content is informational only and based on information available when created. It is not an offer or solicitation, nor is it tax or legal advice. It does not consider your financial circumstances and objectives and may not be suitable for you.
- [06:56]
B
So Jim, the locket effect is you don't really want to stay.
- [06:59]
A
No.
- [07:00]
B
But you don't really want to go.
- [07:02]
A
That is exactly. That's perfect. Wow. That is the whole issue with the housing market.