Thoughts on the Market: The U.S. Housing Market Slowdown

Hosted by Morgan Stanley

Introduction

In this episode of Thoughts on the Market, hosted by Jim Egan and Jay Bacow, co-heads of securitized products research at Morgan Stanley, the discussion centers around the recent trends indicating a slowdown in the U.S. housing market. Released on June 30, 2025, the episode delves into various factors influencing home prices, inventory levels, and regional disparities affecting the real estate landscape.

Slowing Pace of Home Price Growth

Jim Egan opens the conversation by highlighting the latest data on home price growth. He notes that the growth rate for the current month is 2.7%, marking the slowest pace since August 2023. This deceleration is attributed to an increase in housing supply coupled with stagnant demand.

"The pace of home price growth reported this month was 2.7%. That is the lowest that it's been since August of 2023." (00:35)

Jay Bacow probes deeper, questioning whether the increase in supply is exceeding initial expectations for the spring selling season—the typically busiest period for the housing market.

Jim confirms this observation, explaining that inventories are rising more rapidly than anticipated, surpassing levels seen in January or February. Notably, for the past 18 consecutive months, homes listed for sale have been increasing year over year, a trend that has accelerated over the past 40 years. This is underscored by the fact that the recent growth rate in home listings has only been surpassed once before—in the aftermath of the Great Financial Crisis.

"Homes listed for sale are up year over year, 18 months in a row. And that pace... was only eclipsed one time. The great financial crisis." (01:33)

Comparisons to the Great Financial Crisis

Jay expresses concern over the comparison to the Great Financial Crisis, seeking clarification on whether current demand dynamics differ from those during the crisis period.

Jim explains that unlike during the Great Financial Crisis, demand is not responding robustly to the increased supply. Existing home sales have plateaued, showing only a 2% decline over the first five months of the year compared to the same period in 2024. This stagnation, combined with easing inventory levels, has resulted in months of supply returning to levels last seen before the pandemic (late 2019 to early 2020).

"Through the first five months of this year, existing home sales are only down about 2% versus the first five months of 2024. So they've basically kind of plateaued..." (01:41)

Regional Variations and Nationwide Trends

Jay points out the importance of regional factors—“location, location, location”—in analyzing the housing market, prompting Jim to elaborate on nationwide trends.

Jim indicates that while the deceleration in home price growth is a national phenomenon, there are significant regional variations. Specifically, all top 100 Metropolitan Statistical Areas (MSAs) have experienced slower home price growth year over year, with 25% now seeing price declines, a substantial increase from 5% a year ago.

"HPA is now decelerating in 100% of the top 100 MSAs for which we have data... up from just 5% with declining home prices one year ago." (02:55)

He further explains that areas with the highest inventory growth, particularly in Florida and Texas, are seeing more pronounced price softness. Conversely, regions in the Northeast and Midwest are experiencing inventory levels that remain significantly below those of four and a half years ago.

"Of the 14 MSAs that have the highest level of inventory today compared to 2019, 11 of them are in either Florida or Texas." (03:34)

New vs. Existing Home Prices

The discussion shifts to the distinction between new and existing home prices. Jim notes that while existing home prices continue to show growth, new home prices have been declining over the past year and a half. This convergence has narrowed the typical premium associated with new homes to the lowest it's been in three decades.

Jay adds that homebuilders are employing strategies like mortgage rate buy-downs to make new homes more affordable amid higher mortgage rates.

"New home prices are actually coming down... it's brought that basis to its tightest level that we've seen in at least 30 years." (03:42)

Mortgage Rate Buy-Downs and Their Implications

Jay offers an explanation of mortgage rate buy-downs, where homebuilders offer lower mortgage rates to make higher-priced homes more affordable for buyers. He explains that while this strategy can help buyers afford homes, it introduces complexities in the mortgage market, particularly affecting agency mortgage products.

Jim discusses the impact of these buy-downs on the agency mortgage side, highlighting that a portion of purchase loans now originate with rates below the prevailing market rates. Although these buy-downs may support some home sales, they also signal potential softening in home prices.

"We're up to about 12% of Ginnie Mae purchases... about 5% of conventional purchase loans are getting originated with a rate 1% below the outstanding market." (04:38)

Jay outlines two primary implications:

1. Investment Concerns: Investors receiving below-market coupons may be reluctant to sell these assets, potentially leading to longer holding periods.
2. Seller Challenges: Homeowners with below-market mortgage rates might struggle to sell their homes at higher prices, as transferring the advantageous mortgage terms to new buyers is difficult.

Future Outlook for Home Prices

Jim provides a forecast for home price indices, distinguishing between existing and new home dynamics. He maintains that, on a national level, home prices remain supported despite local variations. Currently, months of supply have increased to four to four and a half months, still indicative of a tight market (historically, below six months is considered tight).

Morgan Stanley's base case projects a 2% increase in Home Price Appreciation (HPA) for the year, slower than current rates. The outlook includes:

• Bear Case: HPA could decrease by 3%, reflecting downside risks from supply and demand imbalances.
• Bull Case: HPA could rise by 5%, accounting for potential positive market adjustments.

"Our base case is for positive HPA this year... we're a little bit more skewed to the downside in our bear case. Instead of that plus two we're at minus 3% than we are towards the upside in our bull case. Instead of that plus two we're at plus 5% in the bull case." (06:12)

Conclusion

The episode concludes with Jim and Jay acknowledging the regional nuances in the housing market, reaffirming that while home price growth is decelerating nationally, certain areas continue to experience robust demand and price resilience. They emphasize the importance of monitoring inventory levels and mortgage market dynamics to gauge future trends in home prices.

"Home prices remain more supported than what we are seeing locally... Still positive." (06:33)

Jim and Jay wrap up by encouraging listeners to engage with the podcast and share insights with others interested in market trends.

Key Takeaways

• Slowing Home Price Growth: The national pace of home price appreciation is decelerating, primarily due to increasing supply and stagnant demand.

• Inventory Expansion: Housing inventory has been rising for 18 consecutive months, outpacing seasonal expectations and approaching pre-pandemic levels.

• Regional Disparities:

  • High Inventory Areas: Predominantly in Florida and Texas, experiencing more significant price softness.
  • Low Inventory Areas: Northeast and Midwest regions maintain tighter inventories, supporting stronger price growth.

• New vs. Existing Homes: Existing home prices continue to grow, whereas new home prices are declining, narrowing the price gap between the two segments.

• Mortgage Rate Buy-Downs: Homebuilders offering below-market mortgage rates may influence both the mortgage market and future home sales, introducing potential challenges for both investors and homeowners.

• Forecast: Despite current slowdowns, home prices are expected to continue appreciating, albeit at a slower rate, with potential scenarios ranging from a modest increase to a slight decrease.

Final Thoughts

This episode provides a comprehensive analysis of the current state of the U.S. housing market, highlighting key factors contributing to the slowdown in home price growth. By examining national trends, regional variations, and the interplay between supply, demand, and mortgage dynamics, Jim Egan and Jay Bacow offer valuable insights for investors, homeowners, and market observers navigating the evolving real estate landscape.