Morgan Stanley also described what could happen in the case the U.S. economy enters a downturn scenario next year, which they said is unlikely. In this case, the investment bank expects home prices to drop by as much as 8 percent.
“If [mortgage] rates remain elevated or the economy slips into a recession, demand [for housing] could soften further in 2024,” the Morgan Stanley report said.
“While we do not believe that defaults and foreclosures—and thus distressed transactions—will increase significantly in this cycle, and especially not in 2024, any increases in supply into a weaker demand environment will likely weigh on prices.
“Older homeowners or any capitulation from households that have simply lived in their homes longer than they originally anticipated would likely drive prices down in excess of our forecast.
The Worst Case Scenario: +5 percent increase
In a bull case scenario, where steady economic and job growth in the U.S. leads to a rise in the stock market, Morgan Stanley expects a rise in home prices of 5 percent.
“With so many housing statistics at levels we have rarely seen over the past several decades, it isn’t hard to envision housing activity and home prices evolving differently from what we have laid out above,” the investment bank wrote to investors.
“As mortgage rates come down, affordability will remain under substantial pressure. However, a consumer that has recently seen mortgage rates above 8 percent might jump at the chance to lock in 6.5 percent or 7 percent mortgages in far greater numbers than we are expecting,” it added.
“If demand increases more than we are expecting into a supply environment that remains constrained, we envision home prices climbing a further 5 percent next year to a new record high.