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Has the housing market bottomed? Yes...but, economist says
The worst may be over for the housing market, according to one economist, which could provide a clear view for the economy to stick to a soft landing,
"When asked if the housing cycle has bottomed, our short answer is Yes. But the details are more nuanced," Ellen Zentner, Chief US Economist at Morgan Stanley, wrote in a note on April 21.
Zentner noted that affordability is still a challenge, but it hasn't worsened. On the margins, it's gotten better in the last three months. Housing inventory remains near multi-decade lows, but that, too, is not getting worse.
"Tight (and tightening) lending standards are likely to prevent any meaningful increase in housing activity from here, but our housing strategists also no longer see a catalyst for another leg lower," Zentner added.
As a result, the US gross domestic product (GDP) component related to residential investment could turn neutral during the third quarter of this year.
"As goes housing, so goes the business cycle," Zentner wrote.
Over the last year, the housing market has been slammed by higher mortgage rates, low home-buying activity, and a mild correction in home prices. Other indicators, including building permits and housing starts, have displayed weakness amid elevated rates.
Morgan Stanley strategists expect "deeply negative year-on-year comparisons" in housing activity for the rest of the first half of this year. That should wane in the second half, with activity coming in "flat from here and perhaps move a bit higher."
The investment firm forecasted that home prices would fall 4% this year, and so far, the recent data has been on track with that forecast, Morgan Stanley found. The strategists expect the bottom in year-over-yer price growth to come in the fourth quarter as "home valuations lag housing activity." But the well-documented housing shortage has prevented a major drop in home prices.
That, coupled with the healthy consumer balance sheets and spending, has boosted the outlook from Morgan Stanley on its call that “the housing cycle is bottoming, but we don't expect a big rebound.”
“Now, as other parts of the economy are slowing, a cycle bottom in housing provides an important cushion in our soft landing thesis,” Zentner said.
Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv
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