Borrowing costs briefly dipped below 6% in February, raising hopes of a housing recovery, National Association of Home Builders noted. Rates then rebounded toward 6.5%, where they have remained, and the brief affordability improvement faded before most buyers could act. Many analysts viewed that improvement as the start of a broader recovery, but new Morgan Stanley research argues the dip was temporary.Monthly carrying costs have doubled on a median-priced homeA buyer financing a median-priced home today faces a monthly payment of roughly $2,000, about double what it cost five years ago, the firm estimated.About 70% of existing homeowners hold mortgage rates under 5%, and half are locked in below 4%, Sarah Wolfe, senior economist and strategist at Morgan Stanley Wealth Management, said on the “Thoughts on the Market” podcast.Those owners have no incentive to sell and take on a new mortgage near 6.5%, and that reluctance held existing-home sales at roughly 4.06 million in both 2024 and 2025, the slowest annual pace since 1995, according to National Association of Realtors data.More Real Estate:Americans face major decision after housing market newsZillow reveals major housing market shiftRealtor.com, ATTOM flag alarming housing riskJames Egan, Morgan Stanley’s U.S. housing strategist and co-head of securitized products research, offered a specific example on the same podcast episode to illustrate the gap between staying put and trading up in the current rate environment. A homeowner who purchased in 2016 and refinanced during the pandemic now spends less than 8% of their income on their monthly housing payment. Selling and buying a comparable property today would increase that monthly obligation by $1,300 to $1,400, a jump of roughly 200%.3 Morgan Stanley rate scenarios all lead to same outcomeMorgan Stanley Wealth Management modeled three paths for 30-year fixed mortgage rates, and across all scenarios, housing affordability will not return to pre-2022 levels. 3 scenariosAt 4%, home prices, which have risen roughly 80% since 2016, according to National Association of Realtors data, still prevent a return to pre-2022 affordability. At 5% (base case), mortgage payments decline from about 24% of household income to around 21%. This is still above the 15% post-crisis average, with gains expected to stall around 2027. At 6%, the increasingly likely outcome is that affordability barely budges.5 structural forces making the housing shift permanentWolfe pinpointed five reasons the shift is permanent.Higher long-term interest ratesDemographic pressure as Millennials and older Gen Z enter peak buying yearsRestrictive local land-use regulationSlow permittingRising insurance costs driven by climate risk
Morgan Stanley says housing affordability is unlikely to return to pre-2022 levels, as high home prices, demographics, regulations, and insurance costs maintain market pressure.Drazen Zigic/Getty Images
First-time buyers clearing a permanently higher financial barThe average first-time buyer is still about 36 years old, but the group clearing that bar has become far more financially selective, Wolfe said on “Thoughts on the Market.”Average mortgage balances for first-time purchasers reached $334,000 in 2024, up from $240,000 in 2019 and $195,000 in 2014, according to New York Fed Consumer Credit Panel/Equifax data published in the Liberty Street Economics post. The average credit score required of first-time mortgage borrowers has also climbed to 734 from 718.Where people buy has shifted, too, with the average zip-code income of first-time buyers falling from about $100,000 in 2014 to about $92,000 in 2024, according to the same data. Higher-earning buyers are moving into cheaper communities, and family financial support for down payments has become increasingly common, Wolfe said.Housing affordability strains fertility rates and consumer spendingThe consequences extend beyond housing, as Wolfe identified affordability as the single largest factor suppressing American fertility rates, above child care costs and employment concerns. Lisa Sturtevant, Chief Economist at Bright MLS, called 2026 a reset year shaped by uncertainty, with lower rates drawing some buyers back.The 2026 housing market will be shaped by uncertainty, economic, demographic, and regional…While lower mortgage rates and more inventory will bring some buyers back, this will be a reset year, not a rebound year.Homeowners tend to purchase durable goods at significantly higher rates than renters, and that spending gap carries broad economic consequences for the country, Wolfe explained.A growing share of long-term renters could therefore shift the broader economy toward services spending and away from goods-sector activity, Wolfe warned.Morgan Stanley expects home prices to be supported, but growth to be limitedDespite that affordability pressure, the firm does not expect home prices to decline because tight lending standards have kept borrower distress at historically low levels.The firm forecasts home price growth of around 2% in 2026, accelerating to 3% in 2027, underpinned by limited inventory and steady baseline demand, Egan said.That projection sits between Fannie Mae’s roughly 2% forecast and J.P. Morgan’s flat 0% projection for 2026, with all three firms agreeing that affordability will remain constrained.Morgan Stanley’s research indicates that the broadly accessible homeownership conditions of the two decades before 2022 are not returning.Related: Americans face dilemma after housing market news