Episode Details

Mortgage rates are down, sales volumes are rising and housing is gradually getting more affordable. Our analysts discuss why they think the U.S. housing market is on a healthy foundation. 

----- Transcript -----

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

Jay Bacow: And I'm Jay Bacow, the other Co Head of Securitized Products Research.

Jim Egan: And on this episode of the podcast, we'll be talking about mortgage rates, home sales volumes and the U. S. housing market.

Jay Bacow: Alright Jim. Mortgage rates are down. Sales volumes are up. [Is] the housing market back?

Jim Egan: Sales volumes might finally be inflecting higher, or at least they might actually be finding that bottom. If we look at the seasonally adjusted annualized figures that came in in December, pending home sales increased 8 per cent to their highest level since July. Purchase applications, which -- little bit more high frequency, we have them through January -- they're up 23 percent from the lows that they put in in late October or early November.

Jay Bacow: Alright, that sounds good, but seasonally adjusted annualized figure sounds like a mouthful. Can you lay that out a little easier for us?

Jim Egan: I think that these numbers just need to be put [00:01:00] into a little bit more context. Yes, pending home sales were up 8 per cent month over month. But if I look at just the December print, it was the weakest pending home sales print for that month in the history of that index. Now, relative to 2022, it is improving. It was only down 1 per cent from December of 2022, and that's the lowest decrease we've had since 2021. But these numbers still aren't strong.

Going around the horn to some of the other demand statistics, existing home sales finished 2023 down 19 per cent. But they also strengthened into year end only down 9 per cent in the fourth quarter. New home sales, as we've mentioned on this podcast before. That is the demand statistic that has actually been showing growth up 4 per cent in 2023 versus 2022. Up 15 per cent in the second half of 2023 versus the second half of 2022.

Jay Bacow: Alright, so we’ve got a pickup or an inflection in housing activity, and we’ve had mortgage rates coming down. Affordability is also independent of home prices. So where does all this stand?    

Jim Egan: Right? [00:02:00] So because of those home price increases that you've mentioned, the monthly payment on the medium price home is still up almost $100 year over year. But the path of affordability, the deterioration that we've been talking about -- it's as small as it's been since February 2021. And if we're not looking at this on a year over year basis; if we're just looking at this on a month, over month, or every two-month basis. The two-month increase that we've seen in affordability is the steepest increase, or the steepest drop in unaffordability, if you will, since January of 2009.

Suffice it to say, we think this is a much healthier housing market than 2009.

Jay Bacow: Alright. Now what about the supply side? Because obviously, [there’s] a lot of ways we can get supply. One of the more straightforward methods is for someone just to build a new home. How’s that data looking?  [00: 03:00]

Jim Egan: We are building more homes. As new home sales have moved higher, single unit housing starts have moved higher as well. Now from cycle peak, which we estimate as April 2022, single unit starts fell about 23 per cent through the middle of 2023. And another thing that we've talked about on this podcast in the past is that build timelines have been elongating. And that was leading to a backlog in homes actually under