The surge in mortgage rates could shake the entire US housing market.

According to a previous report by Freddie Mac, US 30-year mortgage rates rose 55 basis points last week from a month earlier, the biggest increase since 1987. Mortgage rates have risen by more than 300 basis points in less than a year. At present, the interest rate on some mortgages is more than 6%.

Borrowing costs have soared to such high levels, putting huge downward pressure on home sales.

If mortgage rates remain at 6 per cent for the rest of the year, or even throughout 2023, it may be unbearable not only for buyers, but also for the entire US housing market, according to a report released by Morgan Stanley's James Egan team on Friday.

Home sales have fallen sharply

On the one hand, the surge in interest rates has seriously eroded consumers' purchasing power, while house prices have just hit an all-time high, and the high cost of buying houses has dampened consumers' desire to buy houses.

On the other hand, existing home inventory is still at an all-time low, coupled with an all-time high of buyers locking in mortgage rates, and the supply of housing continues to be limited.

Buyers who lock in mortgage rates face higher lending rates if they want to sell their current homes, so they are less likely to sell now, limiting supply and sales, according to Morgan Stanley.

Combined with these factors, the desire of American consumers to buy homes has fallen to a 40-year low.

Morgan Stanley predicts that if mortgage rates remain at around 6%,Us home sales will fall 12 per cent in 2022 from a year earlier.Given that sales of existing homes fell by 5% in the first five months of this year compared with the same period last year, this meansSales of existing homes in the second seven months of this year will be 16% lower than in 2021.

Housing start-up rate is declining

Due to falling sales caused by rising mortgage rates and persistent problems in the supply chain, us housing starts fell 14.4 per cent in may, the lowest level in more than a year. If mortgage rates remain high, housing starts are bound to fall further.

Confidence among homebuilders is being weighed down by high interest rates. The confidence index of American homebuilders has fallen by 26% from its all-time high in November 2020.

It is worth mentioning that the overstocking of new homes will slow down the pace of housing construction. Inventories of new homes increased in May as the number of houses under construction returned to 2004 levels. By the end of May, there were 444000 new homes on the market. At the current rate of sales, it will take 7.7 months to use up the supply of new homes.

Morgan Stanley predicts that the US housing market operating rate will continue to decline in the second half of this year.The operating rate for the whole year of 2022 will fall by 4% compared with the same period last year.Taking into account the 3 per cent increase in housing starts in the first five months of this year, the number of housing starts in the last seven months of this year will be 9 per cent lower than in 2021.

The rise in house prices will stagnate.

As housing inventories remain low, mortgage underwriting standards remain strong, which will provide some support for house prices. At the same time, the Fed's accelerated rate hikes and rising mortgage rates have worsened demand, putting downward pressure on house prices.

However, the inventory shortage is more serious than the deterioration in demand, so US house prices will rise slightly.

Morgan Stanley cut his annual price appreciation (HPA) forecast for December from 10 per cent to 9 per cent. Specifically, from December 2021 to March 2022, HPA has reached 6%. This means that house prices will rise by 3 percent from April to December this year.

If mortgage rates remain at or above 6% throughout 2023, sales will accelerate and house price rises will stagnate.

However, this is unlikely to happen. According to Morgan Stanley strategists, mortgage rates are likely to fall in the first half of next year. As a result, the decline in home sales will slow for the whole of 2023, and house prices will rise by 3% from their current levels.