Housing market affordability will improve in 2024 as home prices fall amid more inventory, Morgan Stanley's chief US economist says

Housing market affordability will improve in 2024 as home prices fall amid more inventory, Morgan Stanley's chief US economist says
Aerial view of a residential area with houses in the Phoenix suburb of Chandler.Getty Images
  • Housing market affordability is expected to improve in 2024, Morgan Stanley's chief US economist said.
  • Growth in inventory as homebuilding activity grows stronger will offset an increase in demand.

A change of fortune will be in the cards for the housing market next year, according to Morgan Stanley's chief US economist.

Improving home affordability will thaw what has been a largely frozen housing landscape this year, according to Ellen Zentner's recent market podcast.

"We expect home sales to be weak in the first half of next year, but activity should pick up in the second half and further into 2025, and that's primarily because affordability will improve," she said.

Also massaging the shift will be an increasing supply of homes next year, Zentner predicted. Inventory has been tight after the the spike in mortgage rates over the past year kept many buyers and sellers on the sidelines.

With fewer existing homes on the market, new construction has been the main source of additional supply. And Morgan Stanley expects homebuilding activity to grow stronger next year.


"Home prices should see modest declines as growth in inventory offsets the increase in demand. By 2025, with lower rates, existing home sales should rise more convincingly," Zentner added.

It's been a harsh year for the housing market as mortgage rates, riled up by a breathless rise in Treasury yields, touched 8% in October.

And despite the rising cost of taking out a home loan, home prices remained sky high amid the supply crunch in available dwellings.

But mortgage rates have come down recently as hopes that the Federal Reserve will soon pivot to rate cuts sent Treasury yields plunging.

Markets will see those cuts become a reality by mid-2024 as inflation continues to decelerate, allowing the Fed to keep rates steady and finally make an initial quarter-point reduction in June, according to Zentner.


That will be followed by another 25-basis-point cut in September, she added. And starting in the fourth quarter of 2024, the central bank will likely lower rates by that amount at every meeting, eventually bringing the real rate down to 0.4% by late 2025.

Other positive themes playing out next year will be improving business investment and equipment spending that will finally turn positive after two years of declines.

And while banks tightened their lending conditions this year, many companies dodged refinancing their debt at ultra-high interest rates and won't be pummeled by increasing costs of financing in 2024.

The bad news, Zentner said, will be a slowdown in consumer spending, driven by a cooling labor market which weighs on real disposable income. Higher-for-longer rates will also put further pressure on debt servicing costs for consumers.

Meanwhile, GDP growth is also projected to slow from 2.5% this year to 1.6% in 2024 and 1.4% in 2025. While that represents a soft landing, Zentner noted growth will still be below its potential.