The U.S. Housing Market Slowdown

Summary

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.

Transcript

[Jim 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. And after getting through last week's blistering hot temperatures, today we're going to talk about what may be a cooling housing market. It's Monday, June 30th at 2:30pm in New York. Now, Jim, home prices, we just got another index. They set another record high. But the pace of growth, the acceleration, as the physicist in me wants to say, appears to be slowing. What's going on here?

[Jim Egan]

The pace of home price growth reported this month was 2.7%. That is the lowest that it's been since August of 2023. And in our view, the reason is pretty simple. Supply is increasing while demand has stalled.

[Jay Bacow]

But Jim, this was a report for the spring selling season. I know we got it in June, but this is supposed to be the busiest time of the year. People are happy to go around. They're looking moving over the summer when the kids aren't in school. We should be expecting supply to increase. Are you saying that it's happening more than it's anticipated?

[Jim Egan]

That is what we're saying now. We should be expecting inventories today to be higher than they were in. Call it January or February. That's exactly the seasonality that you're referring to. But it's the year over year growth we're paying attention to here. Homes listed for sale are up year over year, 18 months in a row. And that pace, it's been accelerating over the past 40 years. The pace of growth from this past month was only eclipsed one time. The great financial crisis.

[Jay Bacow]

I always get a little worried when the housing analyst brings up the great financial crisis. Are you saying that this time the demand isn't responding?

[Jim Egan]

That is what we're saying. So 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 at these levels. But that also means that we're seeing the few transactions through May in a calendar year since 2009. And that combination of easing inventory and lackluster demand, it's pushed months of supply back to levels that we haven't seen since the beginning of this pandemic called the fourth quarter of 2019, first quarter of 2020, right before inventories really plummeted to historic lows.

[Jay Bacow]

All right, so 2009, another financial crisis reference but you're also, you're speaking around a national level. And as a housing analyst, I feel like you haven't really spoken about the three most important factors when we think about things which are location, location and location.

[Jim Egan]

Absolutely. And the deceleration that we're seeing in home price growth, and I would point out it is still growth has been pervasive across the country year over year. HPA is now decelerating in 100% of the top 100 MSAs for which we have data. In fact, a full quarter of them, 25% of these cities, are now actually seeing prices decline on a year over year basis. And that's up from just 5% with declining home prices one year ago.

[Jay Bacow]

As a homeowner, I do like the home price growth. And is it the same story when you look more narrowly around supply and demand?

[Jim Egan]

So there might be some geographical nuances, but we do think that it largely boils down to that local inventory growth has been a very good indicator of weaker home price performance, particularly the level of for sale inventory today versus that fourth quarter of 2019. If we look at it on a geographic basis, of the 14 MSAs that have the highest level of inventory today compared to 2019, 11 of them are in either Florida or Texas. On the other end of the spectrum, the cities where inventory remains furthest away from where it was four and a half years ago, they're in the Northeast, they're in the Midwest.

[Jay Bacow]

As somebody who lives in the Northeast, I'd like to hear that again. But you're also. You're quoting existing prices, which. That's been the outperformer in the housing market, right?

[Jim Egan]

Exactly. New home prices have actually been decreasing year over year for the past year and a half. At this point, it's actually brought the basis between new home prices, which tend to trade at a little bit of a premium, to existing sales. It's brought that basis to its tightest level that we've seen in at least 30 years. And that's before we take into account the fact that home builders have been buying down some of these mortgage rates. But, Jay, you've recently done some work trying to size this.

[Jay Bacow]

Yeah. First, it might help to explain what a buy down is. A home builder might have a new home listed at, say, $450,000. And with mortgage rates in the context of about 6.5% right now, the home buyer might not be able to afford that, so they'll offer to pay less. The home builder, often, many of them also have an origination arm, as well, they'll say, you know what, we'll sell it to you at that $450,000, but we'll give you a lower mortgage rate. Instead of 6.5%, we'll sell it to you for $450,000 with a 5% mortgage rate. Then maybe the home buyer can afford that.

[Jim Egan]

New home prices are actually coming down. And by that we're specifically referring to the median price of new home transactions. They're falling despite the fact that these buy downs might be influencing prices a little bit higher.

[Jay Bacow]

Right. When we look at how often this is happening, it's actually hard to get it from the data because they don't have to report it. But when we look at the distribution of mortgage rates in a given month prior to 2022, there were effectively no purchase loans that were originated less than one point below the prevailing mortgage rate for a given month. However, more recently, we're up to about 12% of Ginnie Mae purchases. Those are the more credit constra borrowers that might have a harder time buying a home. About 5% of conventional purchase loans are getting originated with a rate 1% below the outstanding market.

[Jim Egan]

This might be another sign that we're seeing a little bit of softening in home prices. But what are the implications on the agency mortgage side?

[Jay Bacow]

I would say there's probably two things that we're keeping an eye out on because these are homeowners that are getting below market rate. The investors are getting a below market coupon because they're getting sold at a discount. They don't want that, but they're going to stay around for a while. Investors are getting these rates that they don't want for longer. Then the other thing you think about from the home buyer perspective is maybe it's good for them right now. But if they want to sell that home because they're getting a below market mortgage rate, they bought the home for maybe more than other people would have. So unless they can sell it with that mortgage attached, which is very difficult to do, they probably have to sell it for a lower price than when they bought it. Now, Jim, what does all this mean for home prices going forward?

[Jim Egan]

Now, when we think about home prices, we're talking about the home price indices. Those are going to be repeat sales is going to by definition look at existing prices and not necessarily the dynamics we're talking in the new home price market.

[Jay Bacow]

Okay, so all this builder buy down stuff is interesting for what it means for new home prices, but doesn't impact all the HPA indices that you reference Exactly.

[Jim Egan]

At the national level, despite what we've been talking about on this podcast, we do think that home prices remain more supported than what we are seeing locally. Inventory is increasing, but it also remains near historically low levels months of supply that I mentioned. At the top of this podcast, it's picked up to the highest level it's been since the beginning of this pandemic. We're also talking about four to four and a half months of supply. Anything below six is a tight environment that has been historically associated with home prices continuing to climb. That's why our base case is for positive HPA this year we're at plus 2%. That's slower than where we are now. We think you're gonna continue to see deceleration and because of what we're seeing from a supply and demand perspective, we're we are 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. So slower HPA from here, but still positive.

[Jay Bacow]

Well Jim, it's always a pleasure talking to you, particularly when you're highlighting that the home price growth is going to be stronger in the places where I own a home.

[Jim Egan]

Pleasure talking to you too, Jay, and to all of you listening, thank you for listening to another episode of Thoughts on the Market. Please leave a review or a like wherever you get this podcast and share thoughts on the market with a friend.

[Jay Bacow]

Or colleague today, go smash that subscribe button.

[C]

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.