Activity in the U.S. housing market is currently at its weakest pace in more than 40 years. But if mortgage rates in the U.S. come down, even without returning to historic lows, it could be enough to motivate homebuyers to make purchases, according to Morgan Stanley Research. Although high prices remain a barrier to entry, a decline in rates could help restart the market’s momentum—which could have positive impacts on the overall economy.
“People have been stuck in their homes longer than they otherwise would have been because they have been locked in by the low rates of their current mortgages,” Morgan Stanley Strategist James Egan says. “For those households that have been delaying a move—for instance, people who would have traditionally moved to accommodate growing families—a mortgage rate of 5.5% or 6% could be attractive enough because of how appealing it is relative to the 8% level of recent memory.”
What Could Be Next for Housing
A combination of historically high mortgage rates, elevated prices and low inventory has driven existing home sales down to their lowest level since 1981.
It’s a sharp contrast from the period of 2020 and 2021, when millions of Americans took advantage of mortgage rates below 4% to buy or refinance homes.
A January survey of 2,000 people conducted by Morgan Stanley showed that, among individuals considering buying a home in the next six months, 91% would be either much more likely or somewhat more likely to execute on the transaction if mortgage rates were to fall to 5.5% from current levels.
The average 30-year fixed mortgage rate in the U.S. was at 6.65% in the second week of March, according to Freddie Mac1. In January, the rate surpassed 7% for the first time since May. The median price for existing homes was at $396,900 in January, a 4.8% increase from a year earlier, the National Association of Realtors said in February.2
The survey showed that home prices are seen as the main obstacle for purchases, with 37% of prospective homebuyers pointing to it.
“Responses to our survey are helpful in thinking through the evolution of the housing market in its current unique position,” Egan says. “As we would have expected, the record level of home prices presents a formidable barrier to entry. But relief on the mortgage rate front appears poised to catalyze action.”
Housing Activity to Boost Consumption
If lower mortgage rates do unlock the housing market, it could have implications for the broader U.S. economy.
“Housing flows into gross domestic product (GDP) not only through residential investment, but also through the impacts on consumption,” says Morgan Stanley economist Heather Berger. “Households spend more on durable goods following home purchases.”
Additionally, as home prices remain elevated and people grow the amount of equity in their homes, they experience a “wealth effect” that also boosts spending.
Millennials and Gen Z to Lead Homebuying
Morgan Stanley’s survey indicated that Millennials and Gen Z, or people born between 1981 and 2012, are the most eager to buy homes in the near term. Homeownership rates for these younger generations have decreased because of the record low supply in the housing market over the past few years and challenging levels of affordability.
However, the net financial wealth of Millennials has increased significantly over the past five years.
The survey data show that the most significant barriers to homebuying for Millennials and Gen Z were home prices, followed by credit scores, and then down payments. Mortgage rates came in as the fourth largest obstacle.
“Younger consumers’ ability to buy homes will be a large determinant of their wealth accumulation and future consumption,” says Morgan Stanley economist Arunima Sinha. “As home prices are no longer increasing, these pressures should start to ease. However, with housing activity still relatively low in the near term, homeownership rates will likely take longer to normalize.”
For deeper insights and analysis, ask your Morgan Stanley Representative or Financial Advisor for the full report, “Housing Through the Consumer Lens,” (Feb. 10, 2025).
