Episode summary
The Obstacles to Buying a First Home
Thoughts on the Market (Morgan Stanley)
· · 13 min · Guests: James Egan, Sarah Wolfe
Summary
First-time buyers are facing a housing market with a structurally higher bar to entry. The host and the guest argue that mortgage rates, while off their peaks, are still high enough to keep monthly payments far above the levels seen before 2022, and that this is compounded by tighter credit, demographic demand, land-use constraints, and climate-related insurance costs. The guest says the result is a wider divide between who can own a home and who cannot, with more of the wealth accumulation going to those already on the ladder.
A brief dip below 6% in February showed that lower rates can help, but only at the margin. The guest says that fall in rates cut the monthly payment on a median-priced home from about $2,200 to $1,900 and reduced the share of income devoted to mortgage payments from about 26% to 22%, yet it did not materially revive sales. The host adds that the lock-in effect is keeping current owners in place, limiting inventory and slowing turnover across the broader economy.
Looking ahead, the host and guest expect affordability to improve only modestly. The guest says conventional mortgage rates are unlikely to fall below 6% through the end of 2027, while income growth may gradually outpace home price appreciation. That should support home sales and keep home prices steady, but it does not restore the very affordable conditions seen after the financial crisis.
Key takeaways
- The guest says housing is resetting around a structurally higher barrier to entry because rates, demographics, regulation, and insurance costs are all working against first-time buyers.
- A short-lived drop below 6% mortgage rates cut the monthly payment on a median-priced home to about $1,900, but the guest says it still did not bring buyers back in force.
- The host says the lock-in effect keeps existing homeowners from selling, suppressing inventory and helping keep home prices elevated.
- The guest says first-time buyers are becoming more financially selective, with average mortgage balances rising to nearly $350,000 from $240,000 in 2019.
- The guest expects conventional mortgage rates to stay above 6% through the end of 2027, with only modest affordability improvement from income growth outpacing home prices.
Notable quotes
“the housing market is resetting at a structurally higher barrier to entry”
“mortgage rates are sitting around 6 1/2% and they should come down from here, but maybe not better than 5 1/2%, right”
“the dip below 6% was very exciting. It happened this past February. It was the first time that mortgage rates fell below 6% since 2022”
“we don't have conventional mortgage rates getting below 6%”
How the episode opens
Welcome to Thoughts on the Market. I'm Jim Egan, Morgan Stanley's US Housing Strategist and co-head of securitized products strategy. — And I'm Sarah Wolf, senior economist and strategist within Morgan Stanley Wealth Management.
And today, why firsttime home buyers are facing a tougher path to ownership. It's Tuesday, June 23rd at 10:00 a.m. in New York.
Buying a first-time home has always been a big step, but for a growing number of first-time buyers today, the goal can really seem insurmountable. Mortgage rates might be down from where they were in the second half of 2023, but they're significantly higher than they were for the several years before that. Monthly payments have roughly doubled for a median priced home.
And my colleague Jay Bakau and I have talked several times on this podcast about how many homeowners feel like they're locked in to those lower rates and they're staying put because they just don't want to give up a two or three handle mortgage rate for something that has a six in front of it. But Sarah, as we know, this is bigger than just firsttime buyers. Now, they often start the housing transaction chain and when they can't buy, current owners may not be able to sell and trade up.
that slows turnover across the market and it also reduces activity tied to housing from mortgages and renovations to moving and furniture and it can keep wouldbe buyers renting for longer which adds pressure to rental demand. So, how do you see the situation? Is this just another affordability squeeze or has the housing market reset to a higher barrier to entry?
I do think that we're on the upper bound of affordability pressures. This is about as bad as it's going to get. But as we discussed in our recent publication of the economy explained, unfortunately, we do think that the housing market is resetting at a structurally higher barrier to entry.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- first-time homebuyers
- housing affordability
- housing market reset
- higher bar to entry
- mortgage securitization
Companies and tickers mentioned
- MS
- Morgan Stanley
Watch the episode
Watch “The Obstacles to Buying a First Home” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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