Home prices are projected to potentially drop by up to 5% in the coming year if mortgage rates remain at their current level, according to financial giant Morgan Stanley. The bank’s strategists have identified a recent surge in mortgage rates, with the average 30-year fixed rate reaching 8% this week. This marks the highest borrowing cost for mortgage applicants since 2000, further exacerbating affordability challenges in the short term.
Morgan Stanley foresees that under their base-case forecast, mortgage rates at these levels could result in flat home prices by the end of the year. However, if mortgage rates continue to hover around 8%, the impact on demand is expected to be more severe. The bank’s strategists explain that a 5% growth in inventory next year, without a corresponding increase in sales, could lead to a 5% decline in home prices by December 2024.
The surge in mortgage rates has already dampened activity in the housing market throughout 2022 and 2023, causing limited supply and driving up home prices. Nevertheless, an extended period of high rates could reverse this trend. Morgan Stanley emphasizes the potentially negative consequences for home prices if mortgage rates persist at the 8% level.
However, this scenario may not materialize as the bank anticipates the yield on the 10-year US Treasury to ease to approximately 3.9% by mid-2024, subsequently dragging down mortgage rates.
At present, home prices continue to rise. The median existing US home price rose by 2.8% in September compared to the previous year, as reported by the National Association of Realtors. Concurrently, inventory has dropped by 8%, and home sales have reached their lowest level in 13 years.
Overall, prospective buyers who have been sitting on the sidelines may find some relief in 2024 if mortgage rates remain stable, leading to a potential drop in home prices. However, the trajectory of mortgage rates and the broader economic landscape will ultimately determine the direction of the housing market.
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