What Happened: Morgan Stanley anticipates a 4% year-over-year gain in U.S. home prices by the end of 2022 as determined by the Case-Shiller Index.
However, given that the Case-Shiller Index rose 8.9% in the first half of 2022, Morgan Stanley anticipates a 5% decline in U.S. home values in the second half of the year.
The decline in housing prices won't end there. According to Morgan Stanley, the Case-Shiller Index's assessment of U.S. home values would decline 4% more in 2023.
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The investment bank projects that between June 2022 and the bottom in 2024, housing values will decline by almost 10% overall, up from its previously forecasted 7% decrease.
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Home prices in the U.S. fell 27% between 2006 and 2012 as a result of the last housing correction, which was characterized by high unemployment, "pressurized affordability," dubious lending products, and excess supply.
Now, though, affordability is under pressure due to inflated property prices and rising 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,” Morgan Stanley researchers said.
Why It Matters: Going forward, three levers can help to depressurize affordability, according to the bank.
In theory, mortgage rates should decline and affordability increase if inflation slows and financial conditions ease.
Income growth (up 4.4% year over year) may increase affordability.
If home prices keep dropping, affordability would be depressurized.
Morgan Stanley anticipates that third lever will be pushed so long as affordability is under pressure.
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