Housing Market Best and Worst Case Scenario for 2024 Revealed

Morgan Stanley, one of the world's most prominent investment banks, updated its predictions for the United States housing market next year, considering two possible scenarios: one where the U.S. economy enters a "bull" market and one where it descends into a "bear" market.

In a 59-page report shared with investors, Morgan Stanley stated that it expects the U.S. economy to avoid a recession next year and the housing market to pick up as incomes rise and mortgage rates continue to fall slightly. As of last week, mortgage rates had dropped for three consecutive weeks, showing that the market was reacting to the Federal Reserve's pause of its aggressive rate hike campaign.

In its base case scenario—the most likely to occur—Morgan Stanley expects the new year to bring good news for aspiring homebuyers who have been struggling with skyrocketing house prices and higher mortgages, bringing down home prices and making the purchase of a home a more affordable challenge.

According to the latest update of its forecast for next year, the investment bank expects home prices in the U.S. to fall on average by 3 percent across the country.

"We think we are poised for an improvement in affordability that we have only seen a handful of times over the past ~35 years," Morgan Stanley wrote in the report shared with investors, as mentioned by ResiClub.

"We expect home prices to fall modestly as housing activity picks up versus 2023, with new home sales outpacing existing sales, but think the strong fundamentals of existing homeowners will prevent sizable corrections," the report added.

As of October 31, the latest data available on Zillow, the average home price in the U.S. was $346,653, up 1.8 percent from a year prior.

According to several analysts, the pick-up in home prices is due to a lingering lack of inventory, which has brought up prices during the pandemic and has not quite been solved yet on a national level. Homeowners who had secured lower mortgage rates than the current ones have also stayed put in the past year, contributing to a shortage of homes on the market.

Newsweek contacted Morgan Stanley's press team for comment via email on Wednesday.

The Bear Case Scenario: -8 percent

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 Bull Case Scenario: +5 percent

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."