#Home prices won’t fall this year, analysts predict [Video]

Morgan Stanley housing analysts no longer think home prices will decline this year.

“We now expect home prices to end the year flat to December 2022 as opposed to our prior base case of -4%,” James Egan, a strategist at Morgan Stanley, wrote in a note to clients Tuesday with the firm’s housing research team.

Housing prices registered their second monthly gain in March, advancing 0.4% from the previous month, the S&P Corelogic Case-Shiller Index showed May 30, as inventory challenges keep a floor on prices. That followed seven straight months of declines starting midyear 2022 as mortgage rates surged higher.

Year over year, home values ticked higher by just 0.7% — a continued trend of deceleration.

“While we continue to believe that year-over-year home price growth will turn negative next month, we expect the time below zero will be short,” Egan added. “We think there is more room to the upside in our home price forecasts than the downside.”

Supply vs demand

The biggest factor in the housing market remains the lack of inventory.

The housing market today has 39% fewer homes for sale compared to before the pandemic, according to Redfin. The total number of homes for sale dropped 6% from a year ago during the four weeks ending June 11, the report said, indicating the largest drop in 13 months.

“While the inventory of homes available for sale had been growing at the margins since March of 2022, that pace of growth had slowed meaningfully in the past few months and officially turned negative in April,” Egan wrote.

High mortgage rates have discouraged homeowners from listing their homes because they don’t want to lose their current low mortgage rate. That’s dented sales in the resale market. Existing home sales retreated 3.4% in April to an annualized rate of 4.28 million, data from the National Association of Realtors showed, largely because buyers couldn’t find a house to purchase.

That’s pushed homebuilders to accelerate the gas pedal on the excavator. New residential construction for both single- and multi-family units climbed 21.7% to a seasonally adjusted annual rate of 1.631 million units in May, the Census Bureau reported Tuesday.

With fewer choices, more potential homebuyers are flocking to the newly built market. New homes sales gained 4.1% to a seasonally adjusted rate of 683,000 units in April.

“The tight existing inventory environment has been a tailwind for new home sales, which were up 11% year-over-year, the first such increase in 14 months,” Egan wrote.

“In fact, new home sales made up the largest share of total transactions in the first quarter of the year since 2006. This dynamic has been contributing to improving homebuilder sentiment, which has increased each of the past six months after decreasing in every month of 2022,” he added.

In fact, builder confidence pushed into positive territory in June for the first time in 11 months, according to the National Association of Home Builders (NAHB)/Wells Fargo housing market index released Monday.

Mid-year temperature check

The Morgan Stanley housing strategists called the housing market “a study into the juxtaposition of affordability and supply.”

While they expect affordability to remain challenged, it won’t deteriorate further. At the same time, supply will remain tight as credit standards stay constrained in the wake of the banking fallout.

“These ingredients combine into a recipe that we think leaves the steep declines in home sales and housing starts behind us, but also prevents any sharp increases over the forecast horizon,” Egan wrote.

Meanwhile, the investment bank expects existing home sales to lag new home sales as a large share of homeowners remain locked into low mortgage rates.

“We forecast existing home sales to finish 2023 14% below 2022 levels while new home sales scratch out a 2% gain,” Egan said. “Single-unit starts fall 12% for the year, but that is an improvement from where they sit today, down 29% year to date.”

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Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv

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