In conversation with James Egan, Co-Head of Securitized Products Research and US Housing Strategist, Morgan Stanley
Q: How do you see the US housing market evolving in the near term, and how are consumer credit dynamics influencing this?
So when we think about the US housing market over the near term, we like to lean into our four pillar framework that's demand for shelter largely going to be household formations, the supply of homes available for sale, both existing listings and new builds, the affordability of the US housing market and the quality and availability of mortgage credit, and when we think about the housing market really over that near term, it's the affordability of the US housing market and how many homes there are for sale. Affordability has improved pretty significantly from the fourth quarter of 2023 to where we are today. It's not unprecedented, but we have seen this before. Now, mortgage applications, it seems like they're responding to lower mortgage rates, but that's really only on the refinance side of the equation. Purchase applications have kind of muddled along for the past 12 months. We can see the fact that existing home sales, new home sales, were kind of at the lowest absolute volumes we've been in about a decade now. That's actually not too unusual. First 12 months of affordability improvement, home sales don't normally pick up all that much where they really start to pick up following 12 months, following 24 months. So we think we might be entering that sweet spot, really, in the fourth quarter of 2024 and it's what a lot of the questions from this conference have really been centered around. Now we don't think you're going to see the same reaction from the homebuyer when we go over the course the next 12 months as you have in prior periods, because affordability has improved. It's still more challenged than it's really been at any point in the past 30 years outside of 2023 and the lock in effect, has been such a popular talking point within the housing market that still exists, 75% of mortgages still have a rate below 5% existing listing volumes are the lowest levels we've had on record. Yes, they're not getting lower anymore, but they're holding at incredibly low levels. So we think you're going to start to see sales volumes pick up. We have existing home sales planning by about 5% next year. We think new home sales are going to take on a larger part of that share, or they're going to continue to maintain a larger part of that share. And we think home prices will continue growing. Pace of that growth has to slow. We're at 5% now, down from six and a half about four to five months ago. I think we finished the year at about 2% and move roughly in the two to 3% range as we go through 2025.
Q: With ongoing shifts in the U.S. housing market, what trends do you anticipate? and how should investors position themselves for the upcoming year?
Our housing outlook, we're constructive. We think the housing market's on a very healthy foundation. We think purchase applications will pick up a little bit as rates come down, refinances will pick up a little bit more. We think home price growth will slow, but it will remain positive. That is a healthy fundamental outlook for the mortgage market. On top of that, you have the Fed cutting into a pretty healthy economic environment. GDP remains high, twos, maybe low threes, depending on what forecasts you're looking at inflation, the labor market, it's slowing, but it's not falling off a cliff. We think that's a pretty healthy environment to be invested in fixed income. Now the non agency RMBs market, it's pricing in a lot of that. So spreads are pretty tight, but we do think that they still offer value, especially at the top of the non QM capital structure. We like the triple A's as high quality carry there.
Q: Why is it important for you to attend ABS East?
This conference. It's, I mean, you can feel it when you're in the Fontaine Bleu. It's just very well attended. You've got issuers, investors, lenders, rating agencies, market participants, across the board, you can really have any conversation that you want to here. And we find that it's a really good place to kind of get our pulse on what's going on in the market as we finish the calendar year, as we kick off the next year. It's really an important part of our calendar.