Wall Street Expects Second-Biggest Home Price Drop Since Great Depression

Newly constructed single-family homes for sale in Encinitas, Calif., on July 31, 2019. Mike Blake/Reuters

Top investment firms, including Morgan Stanley, are predicting a significant drop in U.S. home prices amid high mortgage rates, elevated home prices, and affordability challenges.

Morgan Stanley is calculating home prices to dip by 7 percent by the end of 2023, which is more than twice as large as the 3.1 percent peak-to-trough decline seen during the early 1990s. If the prediction were to become true, it would be the second-largest drop since the Great Depression. The top spot is taken by the 27 percent peak-to-trough decline seen between 2006 and 2021.

Morgan Stanley blamed unprecedented home price growth and spiking mortgage rates for the situation. “Affordability is already challenged, exposing would-be homeowners to an increasing rent environment that erodes their ability to save for a downpayment,” the firm’s researchers wrote in a note, according to Fortune.

“If that were to be combined with increasing unemployment, we could imagine a scenario in which existing home sales continue to outpace the GFC [great financial crisis of 2008–09] to the downside.”

The 7 percent drop is only the investment firm’s “base-case” forecast. The “bull case” predicts an increase of 5 percent in case mortgage rates drop by next spring.

But if the United States slips into a recession, which is Morgan Stanley’s “bear-case” scenario, the firm expects a decline in home prices in excess of 10 percent.

According to mortgage analytics firm Black Knight, median home prices fell by 0.98 percent in August, following a 1.05 percent decline in July. Both these months have registered the largest one-month price declines since January 2009.

More Price Declines, Pessimistic Builder Sentiment

Goldman Sachs is predicting home prices to fall by 5–10 percent in 2023, a big change when compared to the 1.8 percent increase it predicted last month. Even though housing inventory levels are “historically fairly low,” home prices are still falling, the investment bank said, according to Fox.

Mark Zandi, chief economist at Moody’s, sees home prices falling 5–10 percent in case the U.S. economy does not fall into a recession and by 10–15 percent in case of a recession. Credit-rating firm Fitch Ratings is expecting a 5–10 percent decline in home prices next year.

Mortgage applications fell to a 25-year low in the week ended Sept. 30, according to data from the Mortgage Bankers Association (MBA).

Meanwhile, homebuilders are becoming more pessimistic, according to a report released last month by the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index.

Homebuilders blame rising mortgage rates for making housing less affordable for first-time buyers when home prices are already elevated.

As the recession in the housing market is showing “no signs of abating,” homebuilders are being forced to lower their prices, NAHB said in the report.