Morgan Stanley Says Cheap Housing May Never Return as US Household Debt Climbs

• Morgan Stanley’s outlook points at how the US housing market may never return to pre-2022 affordability
• Mortgage rates could fall, but housing affordability is expected to remain under pressure
• US household debt hit a record as consumer credit climbed to $5.14 trillion

The US housing market has spent the past few years waiting for lower mortgage rates to bring affordability back. Morgan Stanley’s housing outlook does not seem to think that’s how this cycle ends. In a new housing outlook, the bank argues that even a meaningful decline in mortgage rates is unlikely to restore pre-2022 affordability. This view comes as US household debt continues climbing. It has left many Americans juggling higher borrowing costs well beyond home loans.

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Morgan Stanley Sees the US Housing Market Staying Expensive

Morgan Stanley’s housing outlook modeled three mortgage rate scenarios of 4%, 5%, and 6%. In each case, the bank found that housing affordability remains well below pre-2022 levels.

Its base case assumes mortgage rates settle around 5%. Despite this, monthly mortgage payments would still consume about 21% of household income, compared with the long-term average of roughly 15%. According to Morgan Stanley housing strategist Sarah Wolfe, affordability improvements are expected to stall around 2027 rather than continue recovering.

The report points to several structural issues keeping the US housing market tight. Nearly 70% of homeowners currently have mortgage rates below 5%. This gives them little incentive to sell and limits resale inventory. At the same time, Millennials and Gen Z continue competing for a limited supply of homes, while restrictive zoning rules, slow permitting, and rising insurance costs have made new construction more expensive.

Morgan Stanley also expects home prices to keep moving higher, forecasting gains of 2% in 2026 and 3% in 2027. Financing a median-priced home now costs roughly $2,000 per month. This is almost double what buyers paid five years ago, adding stress to the US housing market. Meanwhile, the average mortgage balance for first-time homebuyers reached $334,000 in 2024.

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Rising US Household Debt Adds to Affordability Pressures

The US housing market outlook comes as the household debt continues to rise. According to the Federal Reserve, total consumer credit increased by $25 billion in March to a record $5.14 trillion. This marks the largest monthly increase in a year. Revolving credit, including credit card balances, rose by $10 billion. Amidst this, non-revolving credit, such as auto and student loans, increased by $15 billion.

The debt figures don’t directly explain housing affordability, but they add another layer to the challenge. Higher mortgage payments, rising everyday expenses, and growing reliance on credit leave many households with less flexibility to save for down payments or qualify for larger loans.

For the US housing market, Morgan Stanley’s stance is that even if borrowing costs ease, the underlying forces keeping homes expensive are unlikely to disappear anytime soon.

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