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
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.