Morgan Stanley housing analysts expect home prices to hold steady year over year in 2023, before edging lower next year.
"We forecast house prices in 2023 to finish the year flat versus 2022 before falling 2% in 2024 as affordability continues to adjust slowly back to long-run averages and inventories begin a slow climb off multi-decade lows," wrote the firm's housing research team.
This comes as home prices clocked in their fourth consecutive monthly increase in May, climbing 0.7% from the previous month, the S&P CoreLogic Case-Shiller Index showed on Tuesday, amid constrained inventory. At the same time, the index also showed that home prices declined 0.5% year over year.
Average Home Value
Meanwhile, data from Zillow revealed that the average US home value was $348,853 as of July 28, 2023, up 1.2% from the prior year.
"Putting on a rosier pair of glasses, we could also say that home prices have increased 2.8% from January," the firm's housing research team wrote. "We expect this dip into negative year-over-year prints to be a brief one."
Still, that's good news for buyers who have been pressured by affordability due to inflated property prices and rising mortgage rates. After increasing 45% from the start of 2020 to the peak in June 2022, housing prices have since dropped 5%.
The turnaround in home prices has helped affordability become "no longer deteriorating," though it remains challenging, the researchers wrote. At the same time, the deficit of supply, and the prospect of increased regulation on the banking system could lead to "steep declines in home sales and housing starts behind us, but also prevents any sharp increases over the forecast horizon," wrote the firm's housing research team.
"Housing activity has bottomed, but tightening lending standards and a persistent gap between new and outstanding mortgage rates are likely to prevent a meaningful increase in activity this year," wrote the firm's housing research team.
Many homeowners are locked into their current properties because they have a mortgage rate that's well below the prevailing one and so are reluctant to sell. That's made it harder for buyers to find previously owned homes, pushing home resales to tumble 18% compared with June of last year.
The newly built homes market has more life, propped up by buyers discouraged by the resale market. While new-home sales fell 2.5% to a seasonally adjusted rate of 697,000 units in June from the revised May rate of 715,000, according to the Census Bureau, the sales pace was still 23.8% above the year-ago level.
"We forecast existing-home sales to finish 2023 14% below 2022 levels, while new home sales scratch out a 2% gain,"wrote the firm's housing research team.
Total housing inventory at the end of June totaled 1.08 million units, according to the NAR, which equates to 3.1 months of supply at the current sales pace. An industry rule of thumb is that five to six months of supply is generally considered a balanced resale market.
The lack of supply has convinced homebuilders to churn out more homes. The Morgan Stanley team expects single-unit housing starts to end 2023 down 12% versus 2022, an improvement over the 29% decline so far year to date.
"Once again, challenged affordability and a difficult lending landscape prevent substantial increases in the near term," the firm's housing research team wrote about housing activity. "But we do think that the steepest parts of the decline are behind us and envision more of an 'L-shaped' recovery from here."