Will Housing Prices Keep Climbing?

Summary

Podcast Summary: “Will Housing Prices Keep Climbing?”

Thoughts on the Market
Host: Morgan Stanley
Episode Title: Will Housing Prices Keep Climbing?
Release Date: April 24, 2025
Hosts: Jay Bacow and Jim Egan, Co-Heads of Securitized Products Research at Morgan Stanley

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Introduction

In the April 24, 2025 episode of Thoughts on the Market, hosts Jay Bacow and Jim Egan delve into the current dynamics affecting the U.S. housing market. They analyze recent trends in mortgage rates, the impact of tariffs, stock market fluctuations, and sentiment among both home builders and buyers. The discussion aims to provide a comprehensive overview of whether housing prices will continue their upward trajectory amidst these influencing factors.

Current Market Conditions

Mortgage Rates

Jay Bacow opens the discussion by highlighting the recent changes in mortgage rates:

• Jay Bacow [00:24]: “Mortgage rates have decreased about 60 basis points from the highs that we saw in January through the beginning of April. But since the tariff announcements, they've retraced about half of that move.”

He emphasizes the volatility in mortgage rates and its potential implications on housing affordability.

Impact of Tariffs

Jim Egan responds by connecting tariffs to construction costs:

• Jim Egan [01:03]: “Since the tariff announcements, they've retraced about half of that move... we have new estimates on tariffs and that does raise our baseline expectation from about a 4 to 5% increase in the cost of materials used to build a home to closer to 8% right now.”

The hosts discuss how increased material costs due to tariffs are likely to be passed on to home prices, exacerbating affordability issues.

Stock Market Influence

Jim brings the stock market into the conversation:

• Jim Egan [00:45]: “On top of everything you just mentioned, the stock market is down over 15% from recent peaks. So there is a lot going on these days.”

This decline in the stock market adds another layer of complexity, potentially affecting consumer wealth and borrowing capacity.

New Home Sales and Inventory

The discussion shifts to the significance of new home sales:

• Jay Bacow [01:45]: “New home sales as a percent of total make up their largest share since 2006... making up the largest share of the homes that are listed for sale every month in the history of our data.”

Jim notes that the high proportion of new home sales, which are more expensive to build, could intensify the pressure on home prices given the increased construction costs.

Home Builder Sentiment and Housing Starts

Jay points out the current trend in housing starts:

• Jay Bacow [02:28]: “Through the first quarter of this year, single unit housing starts are down 6% versus the first quarter of 2024.”

Jim adds that declining building volumes may further restrict housing supply, thereby exerting upward pressure on home prices.

Home Buyer Sentiment

Addressing buyer sentiment amidst the equity market downturn:

• Jay Bacow [02:45]: “There's got to be home buyer sentiment right now. And that can't feel very good given the sell-off in equity markets and what that does with home buyers ability to afford to put down money for a down payment.”

Jim analyzes historical data to assess the relationship between equity market downturns and the housing market:

• Jim Egan [03:25]: “We identified 10 instances of at least a 20% drawdown in equity markets... every other instance saw home prices actually climb during the equity market correction.”

This suggests that despite declining sales during market sell-offs, home prices may still rise due to underlying demand and supply constraints.

Historical Perspective on Equity Market Drawdowns and Housing

Jim provides a historical overview:

• Jim Egan [03:53]: “In every instance [of equity market corrections], sales declined during the drawdown... once stock markets officially bottomed, sales climbed sharply in the following 12 months.”

However, he notes exceptions when mortgage rates also increased significantly:

• Jim Egan [04:22]: “There are four of these, roughly 10 instances where the decrease in sales volumes is it exceeds 10%. And again, one of those was that GFC housing led global recession. But the other three all had mortgage rates increase by at least 200 basis points alongside the equity market sell-off.”

Mortgage Rate Volatility and Its Effects

Jay and Jim discuss the critical role of mortgage rate volatility:

• Jim Egan [04:25]: “Mortgage rate volatility matters here... it's a double whammy.”

When mortgage rates rise significantly during a stock market downturn, it not only reduces consumers' perceived wealth but also makes homes more expensive, leading to a more pronounced decline in sales.

Homeowner Affordability and Delinquencies

The conversation shifts to the ability of homeowners to manage mortgage payments:

• Jim Egan [06:17]: “If you bought the median priced home at prevailing rates in 2024, you're talking about a payment to income north of 26%.”

He highlights the bifurcation in mortgage performance based on when the mortgage was originated:

• Jim Egan [06:17]: “With mortgages before 2021 behaving a lot better than mortgages after 2021. So the 2022-24 vintages, I would highlight that losses and foreclosures... remain incredibly contained.”

Despite concerns, Jim is optimistic that delinquencies and foreclosures will stay contained, attributing this to the varying mortgage rate environments during different periods.

Future Outlook

Looking ahead, Jim provides his forecast for the housing market:

• Jim Egan [06:17]: “We do think that mortgage rate volatility is going to be important for sales volumes next year... continued support for home prices. They're growing at 4% year over year now. By the end of the year, maybe 2 to 3% growth, a little bit of deceleration, but still climbing home prices.”

Jay adds a cultural perspective on the housing market:

• Jay Bacow [07:48]: “Normally we talk about the housing market. It's location, location, location, but it sounds like the timing of when you bought is also going to impact things as well.”

Conclusion

Jim wraps up the episode by reiterating the key points:

• Despite current challenges, including tariff-induced cost increases and stock market volatility, the underlying factors such as limited housing supply and persistent demand are likely to continue supporting home prices.
• Mortgage rate volatility remains a critical factor that could influence future sales volumes, but the overall trajectory points towards sustained, albeit slightly moderated, growth in home prices.

Notable Quotes:

• Jim Egan [03:53]: “Once stock markets officially bottomed, sales climbed sharply in the following 12 months.”
• Jim Egan [04:25]: “Mortgage rate volatility matters here... it's a double whammy.”
• Jim Egan [06:17]: “We do think that mortgage rate volatility is going to be important for sales volumes next year... continued support for home prices.”

This episode provides a nuanced analysis of the factors influencing the U.S. housing market, blending historical data with current market trends to forecast future developments. Listeners gain valuable insights into how economic indicators like mortgage rates and stock market performance interplay with housing dynamics, shaping the landscape of home prices and sales activity.

Transcript

[A]

Welcome to Thoughts on the Market. I'm Jay Bacow, co head of securitized products research at Morgan Stanley.

[B]

And I'm Jim Egan, the other co head of securitized products research at Morgan Stanley. And today we're here to talk about all of the headlines that we've been seeing and how they impact the US housing market. It's Thursday, April 24th at 9am in New York.

[A]

Jim, there are a lot of headlines right now. Mortgage rates have decreased about 60 basis points from the highs that we saw in January through the beginning of April. But since the tariff announcements, they've retraced about half of that move. Now, speaking of the tariffs, I would imagine that's going to increase the cost of building homes. So what does all of this mean for the US Housing market?

[B]

On top of everything you just mentioned, the stock market is down over 15% from recent peaks. So there is a lot going on these days. We think it all has implications for the US Housing market. Where do you want me to start?

[A]

I think it's hard to have a conversation these days without talking about tariffs, so let's start there.

[B]

So we worked on the impacts of tariffs on the US Housing market with our colleagues in economics research and we did share some of the preliminary findings on another episode of this podcast a couple weeks ago. Since then, we have new estimates on tariffs and that does raise our baseline expectation from about a 4 to 5% increase in the cost of materials used to build a home to closer to 8% right now.

[A]

Now I assume at least some of that 8% is going to get pushed through into home prices, which presumably is then going to put more pressure on affordability. And given the, I don't know, couple hundred conversations that you and I have had over the past few years, I'm pretty sure affordability is already under a lot of pressure.

[B]

It is indeed. And this is also coming at a time when new home sales are playing their largest role in the US Housing market in in decades. New home sales as a percent of total make up their largest share since 2006. New homes for sale so now talking about the inventory piece of this, they're making up their largest share of the homes that are listed for sale every month in the history of our data. And that's going back to the early 1980s.

[A]

And since presumably the cost of construction is much higher on a new home sale than an existing home sale, that's going to have an even bigger impact now than it has when we look to the history where new home sales were Making up a much smaller portion of housing activity.

[B]

Right. And we're already seeing this impact come through on the home builder side of this, specifically weighing on home builder sentiment and single unit building volumes. Through the first quarter of this year, single unit housing starts are down 6% versus the first quarter of 2024.

[A]

All right, and we're experiencing a housing shortage already. But if building volumes are going to come down, then presumably that puts upward pressure on home prices. Now, Jim, you mentioned home builder sentiment, but there's got to be home buyer sentiment right now. And that can't feel very good given the sell off in equity markets and what that does with home buyers ability to afford to put down money for a down payment. So how does that all affect the housing market?

[B]

Now, that's a question that we've been getting a lot over the past couple of weeks. And to answer it, we took a look at all of the times that the stock market has fallen by at least 20% over the past few decades.

[A]

I assume when you looked at that, the answers weren't very good.

[B]

You know, it depends on the question. We identified 10 instances of at least a 20% drawdown in equity markets over the past few decades. For eight of them, we have sufficient home price data. Outside of the global financial crisis, which you could argue was a housing led global recession, every other instance saw home prices actually climb during the equity market correction.

[A]

So people were buying homes during a drawdown in the equity market.

[B]

No, home prices were climbing, but in every instance. And here we can go back a little bit further, sales declined during the drawdown. Now, once stock markets officially bottomed, sales climbed sharply in the following 12 months. But while stock prices were falling, so were sales. And Jay, at the top of this podcast, you mentioned mortgage rate volatility. That matters a lot here.

[A]

Can you elaborate on why I said something so thoughtful?

[B]

Well, it's because you're a very thoughtful person. But why? Mortgage rate volatility matters here. While sales volumes fall in all instances, the magnitude of that decrease falls into two distinct camps. There are four of these, roughly 10 instances where the decrease in sales volumes is it exceeds 10%. And again, one of those was that GFC housing led global recession. But the other three all had mortgage rates increase by at least 200 basis points alongside the equity market sell off.

[A]

So not only were people feeling less wealthy, but homes were getting more expensive. That just seems like a double whammy.

[B]

Bingo. And there were more instances where rates did actually decrease amid the equity market sell off. And while that didn't stop sales from falling. It did contain the decrease. In each of these instances, sales were virtually flat to down low single digits. So call it a 3 or 4% drop.

[A]

All right, so that's a really good history lesson. What's going to happen now? We've been talking about the housing market being at almost trough turnover rates already for some time.

[B]

Right. So when we think about the view forward and, and you talk about trough turnover rates, I've said some version of this statement on this podcast a few times. But there's some level of housing activity that has to occur regardless of where rates and affordability are. And coming into this year, we really thought we were at those levels. I'm not saying we don't still think that we're there, but if mortgage rates were to stay elevated like they are today, as we're recording this podcast, amid this broader equity market volatility, we do think that could introduce a little bit more downside to sales volumes.

[A]

All right, but if we've got this equity drawdown, then I feel like we've been getting other questions from homeowners ability to pay for these mortgages and delinquencies in the pipeline. Do you have anything to highlight there?

[B]

Yes. I think one of the things we've also highlighted with respect to the unique situation that we're in in the US housing market is just how low effective mortgage rates are on the outstanding universe versus the prevailing rate today. We've talked about the implications of the lock in effect. But if we take a closer look on just how much bifurcation that's led to in terms of household mortgage payments as a share of income, depending on when you bought your house, if you bought your house back in 2016, your income, if we at least look at median income growth is up in the interim. You probably refinanced in 2020 when mortgage rates came down, that monthly payment as a share of today's income, today's median household income roughly 8.5%. If you bought the median priced home at prevailing rates in 2024, you're talking about a payment to income north of 26%. When we look at performance from a mortgage perspective, we are seeing real delineations by vintage of mortgage origination. With mortgages before 2021 behaving a lot better than mortgages after 2021. So the 2022-24 vintages, I would highlight that losses and foreclosures, those remain incredibly contained. We, we expect them to stay that way. But when we think about all of this on a go forward basis. We do think that mortgage rate volatility is going to be important for sales volumes next year, but everything we talked about should lead to continued support for home prices. They're growing at 4% year over year now. By the end of the year, maybe 2 to 3% growth, a little bit of deceleration, but still climbing home prices.

[A]

Interesting. Normally we talk about the housing market. It's location, location, location, but it sounds like the timing of when you bought is also going to impact things as well. Jim, always a pleasure talking to you.

[B]

Pleasure talking to you too, Jay, and to our listeners. Thanks for listening. If you enjoyed this podcast, please leave us a review wherever you listen and share thoughts on the market with a friend or colleague today. The preceding 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.