Housing affordability will not return to pre-2022 levels, says Morgan Stanley
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US accessibility houses the market may not improve much in the long run for potential homebuyers, with a new report suggesting they shouldn’t wait for affordability measures to return to their pre-2022 levels.
Sarah Wolfe, senior economist and strategist at Morgan Stanley, said in a report at the time affordability of housing may improve modestly over time, “it is unlikely to return to the best levels of the past, as the market adjusts to a more expensive, tighter supply environment.”
Wolfe noted that there was a brief period of optimism in February when mortgage rates dipped slightly below 6%, but they were short-lived as they returned to around 6.5% and have remained above 6% since then – dampening the housing market’s strength before it gathered steam.
“That last episode is telling. In today’s markets, small changes in prices have big effects on buying, which remains historically smooth, due in part to this rate sensitivity,” Wolfe wrote.
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Home flips fell sharply amid high mortgage rates, notes Morgan Stanley. (Daniel Acker/Bloomberg via Getty Images)
He said if he looked at the housing market from 1990 to 2021, it wasn’t that cheap as it is now about 15% of the time.
That means that even a small improvement in affordability in the current housing market would be considered strong compared to previous cycles over the past few decades.
To reflect today’s affordability challenges, an estimate by Morgan Stanley Research found that the median-priced home buyer faces monthly payment at about $2,000 – almost double the cost of administration five years ago.
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The housing sector may not return to pre-2022 levels, a Morgan Stanley analysis found. (Angus Mordant/Bloomberg via Getty Images)
Homeowners with low interest mortgages were reluctant to sell and take new mortgage with high interest rates, which increased the affordability of new buyers.
“The jump in financing costs is also chilling with sellers. Of existing homeowners, nearly 70% have mortgage rates below 5%, and one-half have rates below 4%. These homeowners often find it too expensive to move and take out a new mortgage at the current high rates. The result is a 4-year low in mortgage interest rates.
Due to the lack of profit in the existing housing market, new construction has played a very important role in the housing market. The report notes that the pace of price cuts has slowed in some areas and shortages have persisted in others, as supply is not developing fast enough to “significantly lower the barrier to entry.”
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New housing construction is helping to support housing market supply, but it is not happening fast enough to significantly improve affordability. (David Paul Morris/Bloomberg via Getty Images)
The challenges of affordability in the housing market have also contributed to the changing characteristics of first time home buyers. While the average age remained close to 36, the debt ratio increased to 734 from 718 in 2019.
First-time home buyers also carry larger mortgage balances, rising to $334,000 in 2024 – up from $240,000 in 2019 and $195,000 in 2014. That growth outpaced inflation by more than two times, the report said, as consumers began buying more codes.
Wolfe went on to say that there could be some improvement in housing affordability when prices stabilize and the pace of home price growth slows, firm prices will reach about 5%, reducing mortgage payments from about 24% of household income to about 21% over the next decade – although that remains above the 15% 7 that followed the 20090 financial crisis.
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“In all cases that is Morgan Stanley Wealth Management modeling – whether mortgage rates approach 4%, 5% or 6% – affordability is not returning to previous peaks. And the likelihood that mortgage rates are closer to 6% than 5% is increasing,” Wolfe wrote.
Wolfe added that “waiting on the sidelines for prices to return to a twenty-year buy before 2022 may prove to be the wrong strategy. The best approach may be to buy when it makes sense for your financial situation — and when the right opportunity presents itself.”
