Home sales are bottoming, but activity isn't about to pick up anytime soon, Morgan Stanley says

• Home sales are bottoming, but don't expect activity to pick up anytime soon, Morgan Stanley said.
• Analysts at the bank pointed to weak demand in the housing market amid higher mortgage rates.

Home sales have bottomed, but transaction activity in the US housing market isn't going to pick up anytime soon, according to Morgan Stanley.

In a podcast on Wednesday, Jim Egan and Jay Bacow, co-heads of securitized products research at the investment bank, pointed to recent upbeat sentiment among homebuilders.The National Association of Homebuilders Confidence Index rose for its fifth straight month in May, with the index climbing out of negative territory for the first time in almost a year. That comes amid a surge in new home sales, which accounted for 15% of single-family home purchases last month compared to 11% a year ago.

But that's unlikely to translate to more home sales broadly, Egan said, pointing to weak demand in the housing market. Purchase applications in May were down 26% compared to May of last year.

Meanwhile, pending home sales in March slumped to the lowest levels ever recorded for the sixth straight month, Egan added, a sign that prospective homebuyers are still mostly sidelined.

"All of this is emblematic of a housing market, specifically housing sales that are finding a bottom, but not necessarily about to move much higher," Egan said.

The housing market has been tough this year, with interest rate increases by the Federal Reserve helping to push mortgage rates close to a 20-year-high. That's put off prospective homebuyers from entering the market, but it has also discouraged homeowners from putting their house up for sale, creating a supply-demand imbalance that's kept affordability low.

Those dynamics will be worsened by the tightening of credit conditions, with banks pulling back on lending after the collapse of three regional lenders earlier this year. That means prospective home buyers could be locked out of getting a mortgage as banks tighten their lending standards.

"When we combine that with affordability that's no longer deteriorating, but still challenged, supply that's no longer setting record-lows each month, but still very tight, all of that is a world where we don't think you're going to see significant increases in transaction volumes," Egan added.

Experts have warned the housing market could be in a deep-freeze, as sales are unlikely to ramp up without mortgage rates coming down, which doesn't appear to be likely in the near term. The average rate on the 30-year fixed mortgage topped 7% this week for the first time since March, per Bankrate's most recent survey.