Morgan Stanley Expert Says Housing Market Has Room to Fall, but Home Prices Should Be Protected

Certain housing activity might slow, but home prices aren't expected to plummet.

It's overwhelmingly been a seller's market since the latter part of 2020, when mortgage rates started falling to record lows and housing inventory shrunk. And sellers have continued to have the upper hand in the real estate market this year, despite rising mortgage rates.

But some financial experts are cautioning that sellers and homeowners alike shouldn't get too cocky. Sky-high mortgage costs could drive more buyers out of the market in 2023, and that could lead to a dip in home prices.

But while the housing market might falter in some way next year, one expert thinks home prices won't be negatively impacted for the most part. And that should spell relief for potential sellers as well as current homeowners.

Home prices may not drop much at all

In a recent CNBC interview, Jim Egan, a housing strategist at Morgan Stanley, said that the housing market could get worse to some degree in the new year. Specifically, existing home sales could fall, and housing starts (meaning, the number of new homes being built) could slow down to a notable degree.

But Egan says it's important to recognize that there are different aspects of the housing market to consider. Housing activity, like sales and starts, is poised to fall further in the new year. But home prices, he said, are likely to be protected.

Now this isn't to say that home price growth will rise in 2023. But that also doesn't mean home prices will plunge. And Egan doesn't think sellers and homeowners have to worry about the latter.

Affordability issues aren't affecting everyone

While mortgage rates could rise even more in 2023, the reality is that affordability has deteriorated more over the past 12 months than it has during any other period of similar length in the history of the housing market. But it's not current homeowners who are being hit by affordability issues. Rather, it's prospective and first-time buyers who are being impacted by a lack of affordability. But current homeowners who are locked into low-cost mortgages are in a pretty good spot.

As such, there's a good chance a lot of current homeowners will seek to stay in their homes in 2023 due to sky-high borrowing costs. For example, why would someone with a 30-year fixed mortgage at 3% look to swap that for a 30-year mortgage at 7%? And if homeowners stay put, housing inventory should remain limited, as it's been for the past couple of years. That could be enough to keep home prices from falling a lot.

Ultimately, home prices are subject to the general rules of supply and demand. When there's too much supply relative to demand, prices are likely to drop.

Although housing market conditions right now aren't favorable to buyers at all, there's still more demand to purchase homes than there is supply. And as long as that situation holds steady in 2023, home prices shouldn't start dropping from their current levels to a drastic degree.