Episode Details

With housing affordability plateauing and inventory picking up, sales could be poised to rise again in the near future.

----- Transcript -----

Jim Egan: Welcome to Thoughts on the Market. I'm Jim Egan, Co-Head of U.S. Securitized Products Research here at Morgan Stanley. 

Jay Bacow: And I'm Jay Bacow, the other Co-Head of U.S. Securities Products Research. 

Jim Egan: And on this episode of the podcast, we'll be discussing the U.S. housing and mortgage markets. It's Wednesday, February 22nd, at 11 a.m. in New York. 

Jay Bacow: All right. So, Jim, when we're looking at data on the housing market, it seems like it's all over the place. We've got home sale activity pointing one direction. We've got home prices doing other things. What's going on? You've had this bifurcation narrative. Is the bifurcation narrative still bifurcating? 

Jim Egan: So to remind our listeners, the bifurcation narrative for our housing forecasts is between home prices, which we thought were a lot more protected, and housing activity, so sales and housing starts where we thought you were going to see a lot more weakness. And I would say that bifurcation narrative still exists. But, as you're saying, the different data have been pointing to different things. For instance, purchase applications, they picked up sequentially in January from December. And after declining in every single month of 2022, the homebuilder confidence has increased in both January and February. 

Jay Bacow: All right. But when I think about what happened over that time period, mortgage rates fell almost 100 basis points from their highs in November, as you measure that purchase application pick up from December to January. Is that playing a role? Do you think that there are signs that maybe housing activity is going to pick back up? 

Jim Egan: So from a mortgage rate perspective, it'd be difficult for us to say it isn't. So we do think that that's playing a role, but we also think it's a little too early to say that housing activity is going to pick back up from here. For one thing, mortgage rates might have come down 100 basis points from mid-November into January, but they've also begun to move higher over the past few weeks. For another, the variables that we've been paying close attention to haven't really shown much improvement. 

Jay Bacow: Those variables, you mean affordability and supply. How are those looking now? 

Jim Egan: Exactly. Now let's think about what drove our bifurcation hypothesis in the first place. Because of the record growth in home prices that we saw in 2021 and 2022, combined with the sharp increase in mortgage rates in 2022. They were up almost 400 basis points before that 100 basis point decline that we talked about. Affordability deteriorated more than at any point in over three decades. In fact, the year over year deterioration was roughly three times what we experienced in the years leading up to the GFC. 

Jay Bacow: Now we want to remind our listeners that this affordability deterioration is really for first time homebuyers. Given the vast predominance of the fixed rate mortgage in the United States most homeowners have a low 30 year fixed rate mortgage with an average rate of about 3.5%. Obviously, their affordability didn't change. What did change was prospective homeowners that are looking to buy a house and now would have to take a mortgage at a higher rate. That does mean that those people with a low fixed rate mortgage, they've got low rates. 

Jim Egan: And that means that they simply have not been incentivized to list their homes for sale. The inventory of exi