Home prices could drop 5% next year if mortgage rates stay at 2-decade highs, Morgan Stanley says
- Home prices could drop as much as 5% next year if mortgage rates stay at this level, Morgan Stanley said.
- "Longer term, if mortgage rates were to stay close to 8%, the headwinds this would represent for demand could prove to have a more negative impact on home prices."
Buyers sidelined from the housing market could find some relief in 2024, as home prices could drop next year if mortgage rates stay close to their current levels, according to Morgan Stanley.
The bank's strategists pointed to the recent surge in mortgage rates, with the average 30-year fixed rate climbing to 8% this week.
It's the highest cost of borrowing mortgage applicants have faced since the year 2000, and experts say it's likely to worsen affordability conditions over the short-term.
Mortgage rates at these levels could cause home prices to be flat by the end of the year, under Morgan Stanley's base-case forecast. And if mortgage rates stick around this level longer, demand will see more of an impact.
"In our view, even a 5% growth in inventory next year would yield a 5% drop in home prices by December 2024 if it came alongside zero increase in sales," Morgan Stanley strategists said in a note this week.
Rising mortgage rates sidelined a good deal of buyers and sellers from the housing market through 2022 and 2023.
That's led to a dearth of available supply, which has pushed up home prices over the past year. But a prolonged period of high rates could reverse that trend.
"Longer term, if mortgage rates were to stay close to 8%, the headwinds this would represent for demand could prove to have a more negative impact on home prices," Morgan Stanley said.
That scenario may not come to pass, though. The bank forecasted the yield on the 10-year US Treasury to ease to around 3.9% by mid-2024, which is likely to drag down mortgage rates.
For now, home prices are still rising. The median existing US home price rose 2.8% in September from a year ago, according to data from the National Association of Realtors. That came as inventory dropped 8%, with home sales sinking to their lowest level in 13 years.