Morgan Stanley, one of the biggest investment banks in the world, has changed its expectations for house price changes in the United States next year and it now forecasts steeper drops than previously thought.
Back in August, the Manhattan-based multinational investment bank and financial services company predicted that house prices would drop by 2 percent next year. Now, Morgan Stanley has released a report containing a bear case scenario where house prices could drop by as much as 5 percent next year.
This scenario refers to the possibility of the U.S. economy entering a bear market, a situation of decline where share prices are continuously dropping, the economy slows down and unemployment rises.
Home prices across the U.S. remain historically high, and much higher than many can afford, especially as mortgage rates have yet to come down and are still breaking records. As of September 30, the latest data available on Zillow, the average U.S. home value was $348,539, up 1.1 percent from last year.
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“If home sales remain at these levels for an extended period of time, we become even more reliant on inventory staying at record lows to prevent home prices from falling,” the report reads. “In our view, even a 5 percent growth in inventory next year would yield a 5 percent drop in home prices by December 2024 if it came alongside zero increase in sales.”
Essentially, Morgan Stanley is referring to the fact that, while home prices have dropped between last June and May this year amid what experts called a “correction” of the housing market, the average cost of homes has bounced back because of a stubbornly low supply of homes combined with still-high demand.
Inventory has been historically low in the market for a while now, starting from the pandemic. While new construction projects have taken off this year, it was not enough to close the existing gap between supply and demand.
Morgan Stanley analysts stressed that this is not their base case scenario.
“Our Interest Rate Strategy team expects 10yr treasury rates to come down to 3.9 percent by the middle of the next year, and in that scenario mortgage rates would decrease from these levels as well,” the report reads.
“As we highlighted earlier, the initial inventory reaction to rising rates has been renewed decreases, not increases. But if rates were to remain elevated and demand weak, our focus would become even more trained on supply.”
The company did not share details of its base case scenario in the report. Newsweek reached out to Morgan Stanley for comment by email on Friday.
According to Redfin, the 2022 median household income in the U.S. was roughly $75,000. A recent study by Redfin revealed that the typical American household would need to earn an extra $40,000 to afford the cost of a typical home, for a total of $115,000 a year.
It’s unlikely that even a 5 percent drop in prices would resolve the affordability crisis in the U.S.
Uncommon Knowledge
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Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
