00:00 Speaker A
Well, mortgage rates hold steady for another week. Affordability does remain remain a pain point in the housing market. Our next guests point into a mixed picture in leading indicators for demand. That’s Jim Egan, Morgan Stanley US Housing strategist and co-head of securitized Products research. Jim’s here with me in the studio. Thanks for being here.
00:16 Jim Egan
Thank you for having me.
00:18 Speaker A
So, given that we have not seen that much movement on rates and notably not that much relief on rates, do we remain in this sort of stuck place in the housing market?
00:29 Jim Egan
I think for the most part we’re locked in and priced out from a housing market perspective, but I do think there have been some interesting developments in terms of how different parts of the market have evolved over the past few months. For instance, to your point, affordability, incredibly stuck, and you’re seeing sales volumes, existing home sales volumes having trouble kind of picking up as a result of that. First four months of this year, existing sales volumes are down about 2% versus last year. Effectively flat, down a little bit, but that means that this is the fewest number of sales through four months of the year that we’ve seen since 2009, which is never really a year you want to compare the housing market to.
01:17 Speaker A
No. Well, we’re not seeing any other comparisons though to 2009 in terms of, I mean, you’ve really got your eye on where there were signs of strain in that period of time. That’s that’s your where your business lies. And I don’t think anybody is worried necessarily about a repeat of that situation.
01:43 Jim Egan
Not even close. There’s a whole host of reasons why we can talk to that, but the biggest piece here is that locked in part of this, right? Rates are incredibly elevated. We’re at 6.8% give or take from a prevailing rate perspective, which means that the home the homeowner with a mortgage rate of about 4.05%, they’re locked into that home. So sales are down, but inventories are down as well. Now, inventories are picking up a little bit here, putting a little bit of downward pressure on your over-year price growth, but it’s pressure on price growth. We’re still seeing home prices climb because you have this incredibly locked in supply environment.
02:36 Speaker A
Um, so is the real pivot going to be rates? Is that kind of the thing that needs to change or there are other things that are having an effect too?
02:48 Jim Egan
So, there’s a few different aspects to the housing market right now. We’re talking about the existing inventory piece of this and the lock in there. When you talk about supply shortage and housing, it’s not just existing. It’s the building piece of this. And when we think about how housing statistics have evolved so far this year, the one that’s down the most, at least the one that we look at that’s down the most from 2024 is single unit housing starts. We’re down about 7% year over year from the first four months of 2024 to the first four months of 2025 and we think that we’re in a conservative place at least 1 to 1 and a half million units under built. We can be more aggressive with that estimate if we want to. And that’s something where the impact of tariffs raising cost of goods, that plays a role in terms of potentially bringing down. We’ve seen builder confidence come down, bringing down the single unit start piece. That lack of supply that provides support to home prices, just like the lack of listings from an existing inventory perspective. But when it comes to a catalyst to really get this going again, we do think that those mortgage rates bringing the affordability, we’re better than we were in the fourth quarter of 2023, still more challenged than we’ve been at any real point in the past 40 years, but getting that to a point where people are more comfortable listing their homes and some of that what we believe pent up demand on the sidelines is more willing and able to step in on the buyer side.
05:11 Speaker A
And so, are we going to see any change on that front? Are I mean, are you optimistic that with a fed rate cut at some point, maybe this year that we will get some level of relief in mortgage rates.
05:29 Jim Egan
So, we just went through our whole 12 month ahead outlook process at Morgan Stanley Research and our economists think you’re going to have a little bit of upward pressure over the next few months from inflation as a result of the tariffs. We think that’s going to create a pretty difficult environment for the Fed to cut in 2025. So we don’t see a lot of relief on the mortgage rate front this year and especially not over the course of the next three to four months. We think we’re kind of the title of the housing outlook piece was going nowhere fast. And so, we think we’re kind of stuck here right now. We think there’s a lot of support to sales. They’re down a little bit, but there’s some level of housing activity that has to occur regardless of where affordability is, regardless of where mortgage rates are. Think of it as people that need to move for work, um, people that have growing families, those household formations as people move through their 30s. So we think if sales volumes are effectively supported here moving into 26, that’s when we do think you can start to get a little relief for for a handful of reasons including the market starting to price in a few more fed cuts as we get into that out year, if you will, where we could see a little bit more acceleration on the demand side.
07:00 Speaker A
Right, something to look forward to at least. Thank you so much. Appreciate it.
07:06 Jim Egan
Thank you for having me.
