The housing market is close to bottoming and that will help the US avoid a bad recession, Morgan Stanley says

• The US housing market is about to bottom, and that should enable a soft landing for the economy, according to Morgan Stanley.
• Real estate activity has slowed considerably while home prices have dropped slightly amid 6% mortgage rates.
• "All in all, the housing cycle is bottoming, but we don't expect a big rebound," Morgan Stanley said.

The US housing market is on the verge of bottoming, and that should clear a path for the economy to stick a soft landing, according to a Friday note from Morgan Stanley.

The investment bank highlighted that a year of high mortgage rates has put a dent into the housing market, with a record-breaking decline in activity and sales transactions, combined with a mild correction in home prices. Building permits and housing starts are just a couple indicators that have showed weakness amid 6%+ mortgage rates.

But housing strategists at Morgan Stanley noted that activity is no longer declining and that means the GDP component related to residential investment could finally turn neutral in the third quarter of this year.

"When asked if the housing cycle has bottomed, our short answer is yes... Affordability remains a challenge, but it is no longer getting worse and on the the margin has improved in the last three months. Supply remains near multi-decade lows, but it is no longer getting tighter," Morgan Stanley's chief economist Ellen Zenter wrote.

The investment bank forecasted a 4% price decline for homes this year, and so far the incoming data has been consistent with that estimate. But a lack of supply of homes for sale has limited the depth of the home price decline, which, combined with healthy consumer balance sheets, has given Morgan Stanley confidence on its call that the housing market is about to bottom

And while tightening lending standards due to the collapse of a couple regional banks last month are likely to prevent a meaningful rebound in housing activity, there's also not a compelling catalyst for another leg lower in the housing market, according to the note.

"All in all, the housing cycle is bottoming, but we don't expect a big rebound. In our GDP forecasts, the direct contribution to growth from residential investment improves from -0.5 percentage points in 2022 (the largest drag since 2009) to -0.1 percentage point this year before rising to 0.1 percentage point in 2024," Zenter said.

And as goes housing, so goes the business cycle, Morgan Stanley said, alluding to the idea that if the housing market is in the process of bottoming, that should help the broader economy avoid a hard landing scenario that would include a painful recession.

"As other parts of the economy are slowing, a cycle bottom in housing provides an important cushion to our soft landing thesis," Zenter concluded.