Podcast Summary: "A Rollercoaster Housing Market"
Podcast Information:
- Title: Thoughts on the Market
- Host/Author: Morgan Stanley
- Description: Short, thoughtful, and regular takes on recent events in the markets from a variety of perspectives and voices within Morgan Stanley.
- Episode: A Rollercoaster Housing Market
- Release Date: February 19, 2025
Introduction
In the episode titled "A Rollercoaster Housing Market," Jim Egan and Jay Bacow, co-heads of securitized products research at Morgan Stanley, delve into the dynamic trends currently shaping the mortgage and housing market. Released on February 19, 2025, the discussion provides a comprehensive analysis of housing affordability, home sales, market predictions for 2025, the impact of mortgage rates, and geographical nuances affecting the market.
Current State of the Housing Market
The conversation opens with an examination of the recent headlines surrounding the housing market. Jay Bacow notes the significant rise in mortgage rates:
"Mortgage rates are about 80 basis points higher than the local lows in September. That can't be helping affordability very much." [00:05]
Jim Egan elaborates, emphasizing that while higher rates adversely affect affordability, other factors like declining monthly payments and increasing incomes have nuanced the overall picture:
"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." [00:32]
Affordability Analysis
Egan breaks down affordability into three critical components: monthly payments, home prices, and incomes. He highlights that despite the rise in mortgage rates, income growth has partially offset affordability challenges:
"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]
Jay humorously remarks on the fluctuating nature of affordability:
"Affordability's up, then it's down. It's wrong, then it's right. It sounds like a Katy Perry song." [01:16]
Home Sales Trends
Jim reviews the trends in home sales, noting a persistent challenge despite improved affordability:
"Home sales volumes weren't really increasing despite the improvement in affordability. It normally takes nine to 12 months for sales volumes to increase when you get this kind of affordability improvement." [01:25]
He points out a positive shift in the fourth quarter of last year, with existing home sales up by 8% year-over-year—the first increase since the second quarter of 2021:
"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." [02:06]
Predictions for 2025
Looking ahead to 2025, Egan discusses various factors influencing the market, including supply constraints and listing dynamics:
"Inventory growth has been most subdued in the Northeast and the Midwest, with several markets continuing to see inventory declines." [05:50]
He anticipates that home price growth will continue to slow, projecting a modest increase of around 5% in 2025 compared to 2024.
Jay Bacow inquires about the potential for a decline in mortgage rates to stimulate the market:
"How far would rates have to fall to really incentivize more supply and/or demand in the housing market?" [03:32]
Egan responds by highlighting behavioral economic factors, suggesting that even significant rate drops might not fully reinvigorate the market unless mortgage rates decrease substantially:
"Even if mortgage rates were to decline to 4.5%, only 35% of people would be in the money." [04:17]
Mortgage Rates Impact
The duo explores the intricate relationship between mortgage rates and housing market activity. Jay shares insights from interest rate strategists, indicating expectations that rates may decrease by the end of 2025:
"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%." [05:12]
Jim tempers expectations by suggesting that mortgage rates might only decrease to around 6%, insufficient to trigger a significant market surge:
"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." [05:12]
Geographical Nuances
Acknowledging the diversity of the U.S. housing market, Jim discusses regional variations in inventory growth:
"Eight of the top 11 markets showing the largest increases in inventory over the past year can be found in Florida." [05:50]
He notes that while Florida experiences more substantial inventory growth, the Northeast and Midwest continue to face tighter inventory conditions, impacting local markets differently.
Jay adds a personal touch, expressing specific interest in regional trends:
"Selfishly, as somebody that lives in the Northeast, I am a little bit happy to hear that." [06:17]
Conclusion
The episode concludes with a reflection on the current state of the housing market, encapsulating the complex interplay of mortgage rates, affordability, supply, and regional dynamics. Jim and Jay emphasize that while the market shows signs of gradual improvement, significant challenges remain, particularly concerning affordability and inventory constraints. The discussion underscores the importance of monitoring these factors as the housing market navigates through its ongoing fluctuations.
Jim wraps up with a light-hearted exchange, highlighting the persistent dilemmas homeowners face:
"The locket effect is you don't really want to stay." [06:55]
"No."
"But you don't really want to go." [06:59]
"That is exactly. That's perfect. Wow. That is the whole issue with the housing market." [07:02]
Key Takeaways:
- Affordability Metrics: Despite rising mortgage rates, increased incomes and slight decreases in monthly payments have muted the negative impact on affordability.
- Home Sales Growth: A notable year-over-year increase in existing home sales signals a potential inflection point, though sales volumes remain constrained by tight inventory.
- Market Predictions: Home price growth is expected to slow, with modest increases anticipated in 2025. Mortgage rates may decrease slightly but are unlikely to reach levels that would significantly boost market activity.
- Regional Variations: Florida is experiencing higher inventory growth, while the Northeast and Midwest maintain tighter housing markets.
- Behavioral Factors: Consumer sentiment and behavioral economics play critical roles in housing market dynamics, influencing buying and selling decisions beyond numerical indicators.
For those interested in the nuanced developments of the housing market, this episode offers valuable insights into the factors shaping current trends and future projections.