Source: Yahoo! —
On a national basis, home prices fell 1.3% between June and August. That marked the first decline measured by the lagged Case-Shiller National Home Price Index since 2012.
It’s more than just a small dip, it’s a trajectory shift. At least that’s according to the latest forecast produced by the economics team at Morgan Stanley.
This year, Morgan Stanley expects U.S. home prices, as measured by the Case-Shiller Index, to finish with a year-over-year increase of 4%. But when considering that the Case-Shiller Index was up 8.9% through the first six months of 2022, that means Morgan Stanley expects U.S. home prices to fall by around 5%—including the 1.3% dip between June and August—in the second half of 2022.
The home price correction won’t stop there. Morgan Stanley expects U.S. home prices, as measured by the Case-Shiller Index, to fall another 4% in 2023. In total, the Wall Street bank expects home prices to fall around 10% between June 2022 and the bottom in 2024. (Previously, Morgan Stanley had been predicting a 7% peak-to-trough decline in U.S. home prices).
The last housing correction, which saw U.S. home prices fall 27% between 2006 and 2012, was anchored by high unemployment, “pressurized” affordability, shady mortgage products, and a supply glut. This time around, we just have what Fortune calls “pressurized” affordability: Frothy home prices coupled with spiked mortgage rates.
“The median price of existing home sales is up 38% since March 2020. Mortgage rates are up over 300 bps [3 percentage points] in the past eight months, the first time we have seen anything like that since 1980/81. The combination of the two has caused affordability to deteriorate faster than at any point in our time series,” write Morgan Stanley researchers.
Heading forward, three levers can help to “depressurize” affordability, according to the bank. First, if inflation decelerates and financial conditions loosen, that would in theory push mortgage rates lower and thus improve affordability. Second, rising incomes (which are up 4.4% year-over-year) could improve affordability. Third, home prices continuing to fall would help to “depressurize” affordability. As long as affordability remains “pressurized,” Morgan Stanley expects that third lever to get pulled.
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