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The Housing Market’s Uncertain Future: Contrasting Predictions by Morgan Stanley and Zillow

A Housing Market in Uncharted Territory

The current state of the housing market has left experts with more questions than answers, and while the turbulence is evident, its extent remains uncertain. To gauge the situation, we turn to the metrics of existing home sales, which haven’t seen such a dire condition since 2010, a period reminiscent of the Great Recession. September saw a 15% plummet in transactions, driving the market to a 13-year low—a situation akin to a “deep freeze,” as earlier warned by Zillow in the spring. Some economists, like Mark Fleming from First American and Jeseo Park from Bank of America Research, draw parallels to the “housing recession” of the 1980s. In this volatile landscape, Morgan Stanley conducted an assessment, foreseeing more challenges for homebuyers: a potential national increase in home prices of up to 5%, a shift from their prior prediction of falling prices due to soaring mortgage rates. Zillow, however, offers a contrasting perspective.

Zillow’s Evolving Forecast

Zillow’s stance has evolved since its initial February declaration that U.S. home prices had reached their lowest point. From February through August, Zillow consistently raised its home price forecast. By August, they projected a 6.5% increase in home prices over the next year. However, a change was brewing. Last month, Zillow revised their forecast downward, and this month, they’ve done it again.

According to Zillow economists, home prices are now anticipated to rise by 2.1% between September 2023 and September 2024. This marks a significant shift from their previous prediction of a 4.9% increase between August 2023 and August 2024. The adjustment reflects an unusual month-over-month dip in September and the continuous climb of mortgage rates.

Factors Behind Zillow’s Adjustment

Zillow’s economists acknowledge that a robust labor market is leading to a more extended period of elevated interest rates than initially anticipated. These higher interest rates have begun to affect the housing market, particularly in the decline of new listings. Homeowners with locked-in mortgage rates are choosing to hold onto their properties due to the allure of lower monthly payments.

This revised outlook from Zillow now forecasts a 3.3% increase in national home prices for 2023, down from the 4.3% prediction made in the previous month. Despite the challenge of many prospective homebuyers being priced out or constrained by affordability, active buyers are maintaining competitive pressure on the limited housing inventory.

Morgan Stanley’s Shifting Perspective

In contrast, Morgan Stanley recently made a more dramatic adjustment to its 2023 outlook. Previously, their analysts anticipated a decline in home prices for the year. However, they have now reversed their stance, suggesting that prices may rise by up to 5%. This notable shift was documented in a research note, reflecting the ongoing surge in mortgage rates.

As per Mortgage News Daily, the 30-year fixed mortgage rate reached 8% in the current week—a level not witnessed in decades. Mark Fleming, the chief economist at First American, stated that these rates are likely to persist, particularly if the Federal Reserve proceeds with another rate hike before the year’s end.

The uncertainty surrounding further rate hikes remains. Andrew Levin, a former senior Fed adviser and current professor at Dartmouth College, expressed the potential necessity for more rate adjustments. According to Levin, “There is a very substantial risk that they will need to do more.”

The housing market continues to be a complex puzzle, with various factors at play, keeping both experts and homebuyers on edge.

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