Housing strategist's four 'pillars' blocking the housing recovery

Existing home sales picked up for the month of July, but it is it enough to say that the market is finally starting to recover? Will potential homebuyers see some relief soon?

Morgan Stanley US housing strategist and co-head of securitized products research Jim Egan joins Market Domination to give insight into the challenges that make the housing market recovery difficult.

Egan points out "four pillars" that are in the way of a housing market recovery, one of them being affordability with mortgage rates being too high: "6.5% is high relative to where we've been over the course of the past decade. It's also very high relative to the mortgages that are outstanding in the housing market today," claiming the average is about "sub 4".

"It makes it too expensive for people to feel like they can move. And it's still just if we look at what the median payment is on the median household right now, given where mortgage rates are, we're still talking about for first time homebuyers who aren't locked into those low mortgage rates, it's still less affordable for them to buy than it's been at any point, really, in the past 30, 35 years." says Egan

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This post was written by Nicholas Jacobino

Video Transcript

Mortgage rates have been on a trend to decline.

I'll beat a rocky one since April, and although affordability has improved, the overall housing market remains uniquely challenged with more on what that means exactly.

Let's bring in Jim Egan, US housing strategist and co head of Securitized Products Research at Morgan Sale.

And good to see Jim.

Thank you for having me.

So let's start there.

You need challenge.

What do you mean by that?

How come So when we think about the US housing market, we like to think of it through what we call our four pillar framework, and that helps us from relying too much on any one data point.

We're trying to take all of the different data the housing market is giving us and digest it through that lens we're talking about demand household formations.

We're talking about supply of housing.

We're talking about the affordability of the US housing market and the availability and quality of mortgage credit.

And when we think about a number of those pillars affordability, for instance, it's healthier.

Rates have come down.

They've been a little bit flat week over week, but than eight, exactly 135 basis points better than the fourth quarter of last year.

But it's still very challenged on a multi decade lens, and affordability is playing a role in this.

But supply is arguably tighter than we've ever seen it.

We have the data going back a little bit over 40 years.

That's contributing to these kind of unique challenges in the US housing market.

Well, and psychology as well is playing into it.

I mean, when you're talking about a multi decade high for even if you've seen a pull back from eight right to 6.5.

If you're someone who came of age during the past several decades, 6.5 is still pretty darn high, right?

And so we keep trying to suss out How low do those rates have to go to really pull those people back in?

Absolutely 6.5% is high relative to where we've been over the course of the past decade.

It's also very high relative to the mortgages that are outstanding in the housing market today.

What's the average?

Is it sub four?

I mean, the average still remains sub four, and when we look at that.

That just makes it just too expensive for a lot of people to feel like they can move.

I think it's a combination of absolutely.

It makes it too expensive for people to feel like they can move.

And it it's still just if we look at what the median payment is on the median household right now, given where mortgage rates are, we're still talking about for first time home buyers who aren't locked into those low mortgage rates, it's still less affordable for them to buy than it's been at any point, really, in the past 3035 years.

So what's gonna give in this situation, right?

You you could argue that rates are still gonna come down, but if the supply doesn't ease up, then there aren't gonna be homes to buy, and that's not gonna bring down the prices further, right?

So what we think you're going to see as rates come down from 8% and maybe they come down a little bit further from here, We do think you're going to start to see marginally more listings, and that has started to happen.

The one word I can't use when I'm marketing our housing outlook anymore is we're at actually at the historic low from a supply perspective where eight months in a row, we've seen year over year growth.

The chart still looks like a historic, but we're very close to those numbers.

Um, but we think you're going to continue to see listings pick up on the margins.

That's going to allow for a little bit more from a sales volume perspective.

Not an incredible amount more.

But we think that's gonna weigh on the pace of home price appreciation past three months.

Looking at Case Schiller, we're down from 6.5 to 5.9%.

We think by December we'll get down to plus 2%.

It's still home price growth, but it's much more marginal.

Home price growth if the average three year fix is is +65 now, where where do you see it six months from now, 12 months from now.

So when we think about where the mortgage rate is going right, we're gonna We're very collaborative within our research process at Morgan Stanley, our US economists have been very confident in the soft landing call.

They've been there for quite some time they see another three, or they see 325 basis point cuts to finish out 2024 4 to begin next year.

But when we're thinking about where mortgage rates are, we're gonna be a little bit more focused on the five and the 10 year part of the curve.

And despite the fact that the Fed hasn't cut yet, mortgage rates have already come down over 100 and 30 basis points since the fourth quarter of last year.

When we look at where the market's pricing in kind of five year a year forward, the 10 year a year forward, we're only talking about 10 or 20 basis points lower.

So 6.5% is actually what was built into a lot of our 12 month forward forecasts back in April and May we out there a little bit sooner than we'd expected, but we only really think we're coming.

We're coming down.

Given what the market is pricing, maybe 1020 basis points in the foreseeable future.

Um, even though obviously the existing home market is much larger than the new home market, I do want to say a word about the new homes market right and expansion there.

We, of course, just heard, uh, presidential candidate Kamala Harris talk about a plan to incentivize more construction.

Does that work?

How much does that help do you think?

So When we think about that four pillar framework, we do think that the binding factor right now is really the supply aspect of this.

We don't have enough homes.

Now when we estimate the shortage of housing in the US housing market, I can be conservative and say we're about 1.5 million units shy of where we need to be.

I can get more aggressive and get to 6 million units shy of where we need to be.

The reality probably lies somewhere between those two numbers, but we do think that adding supply, whether it's existing listings, whether it's new homes like that, that is what we're focused on when we think about both the trajectory of sales volumes and the trajectory of home prices moving forward.

She Kamal Harris, also Jim, talked about giving uh, first time home buyers $25,000 in down payment assistance.

If the issue, as you're pointing out, is supply, not demand does that make sense to you?

So the reason again.

And I keep coming back to the four pillar framework.

It's because all of them matter supply matters.

Affordability matters, the demand for shelter matters and they all.

I call them pillars.

You can think about them as a Venn diagram.

They all influence each other, right?

Affordability deteriorates, but home prices don't fall because the lock and effect keeps supply incredibly low.

We need to focus on on all of these components of the housing market.

We just think that right now that limiting or that binding factor is the supply angle.