Let’s not sugarcoat it: 2023 was a bad year for the housing market. Mortgage rates eclipsed 8% at one point, inventory hit all-time lows, and home prices continued to climb.

Next year, however, is shaping up to be better, according to Morgan Stanley. Analysts at the firm say that in 2024 the U.S. will avoid a recession, mortgage rates will fall, incomes will continue to rise and an uptick in listings will spur more housing activity. It will even lower home prices.

While the so-called lock-in effect remains a substantial deterrent for an increase in listing volume, a decline in mortgage rates would increase the possibility that a homeowner lists their home for sale, analysts pointed out. 

While analysts believe that the housing market is unlikely see significant decreases in inventory in 2024, the substantial lock-in effect and the fact the homeowners are [in] strong hands in this cycle should prevent any “material increases” in inventory. In other words, it can’t really get worse, but it probably won’t get much better.

But overall, Morgan Stanley believes the combination of higher incomes, falling house prices and falling mortgage rates will help with housing affordability.

“We think we are poised for an improvement in affordability that we have only seen a handful of times over the past ~35 years,” wrote Morgan Stanley analysts. “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 home price corrections.

Morgan Stanley expects stronger housing activity in the second half of the year and new home sales (+7.5%) to increase more than existing home sales (+2.5%) over the course of the full year.  

As new home sales increase, the report projected a 10% increase in single-unit starts to follow in 2024 to end the year at around 975,000. 

Falling home prices?

“Home prices should see modest declines as the growth in inventory offsets the increased demand. Homeowners remain strong hands, and we don’t expect any sizeable correction in prices, but we do think they (home prices) will be down 3% in 2024,” the memo said.

Though Morgan Stanley analysts didn’t mentioning a specific number, they projected home prices to be even lower in 2025 given the “trajectory of both the economy and mortgage rates.” 

On the other hand, if rates remain elevated or the economy slips into a recession, demand could soften further in 2024. 

“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 report said.

Morgan Stanley’s bear case for a decline in home prices in 2024 is -8% from 2023.