Morgan Stanley: New Home Prices Under Pressure

Current mortgage rates have climbed dramatically, leading to a $300 increase in the monthly payment for a median-priced home since the lows recorded in February, which represents a 15% hike in costs.

This rise in rates has pushed housing affordability to its most challenging point since mid-2023, creating a ripple effect that influences listing volumes, overall home sales, and pricing strategies across the market, according to Jim Egan of Morgan Stanley.

The market is experiencing a significant 'lock-in effect,' where over 90% of current mortgage holders possess fixed-rate loans, many of which were refinanced at record-low rates in 2020 or 2021.

This situation disincentivizes existing homeowners from selling, as their current monthly payments are substantially lower than what they would face with new mortgages, causing aggregate listing volumes to remain 20% below 2019 levels, Jim Egan explained.

The Case-Shiller index also indicates an acceleration in existing home sales prices, even as single-unit housing starts are down 5% year-to-date and remain 20% below their 2022 peak.

New homes available for sale are currently at their highest levels since the 2008-2009 period, creating a substantial supply of approximately eight and a half to nine months, Jim Egan noted.

This elevated new home inventory is exerting downward pressure on new home prices, leading to a situation where median new home prices are now lower than existing home prices for the first time in decades.

Builders are actively trying to incentivize buyers by offering buy-downs, frequently setting rates 100 to 200 basis points below prevailing market rates to move inventory.