The American housing market faces deep-seated structural issues, a reality that strategists at Morgan Stanley believe will largely negate the impact of recent aggressive policy announcements from the White House. Despite directives aimed at injecting liquidity and lowering mortgage rates, the firm’s analysts, James Egan and Jay Bacow, contend that these measures offer only “modestly helpful” adjustments rather than a fundamental cure for affordability challenges, particularly looking ahead to 2026.
One immediate effect of the administration’s plan, which includes instructing government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac to acquire $200 billion in mortgage-backed securities, was a positive ripple in the market. Mortgage spreads tightened by 15 basis points, momentarily pushing the 30-year mortgage rate below 6% for the first time since 2022. However, Egan and Bacow suggest that the market has already largely absorbed this intervention. While any rate reduction is welcome news for prospective buyers, the sheer volume of existing mortgages with significantly lower rates limits the broader effectiveness of such policies.
The core of the problem, according to Morgan Stanley, remains the pervasive “lock-in” effect. A substantial two-thirds of all outstanding mortgages carry an interest rate below 5%, creating a powerful disincentive for current homeowners to sell. This phenomenon is further exacerbated by an observation from Torsten Slok of Apollo Global Management, who noted earlier this year that approximately 40% of U.S. homes are entirely mortgage-free. This means the reluctance to move is even more pronounced than mortgage data alone might suggest, severely constraining the supply of available homes.
This supply shortage is not merely a transient market condition but is intertwined with demographic shifts. Slok has highlighted an increasing concentration of wealth in the hands of those over 70, often bolstered by real estate equity. Concurrently, the U.S. population is aging, and birth rates are declining, leading to slower overall population growth. The number of families with children under 18, for instance, peaked in 2007 at roughly 37 million and has since fallen to an estimated 33 million in 2024. This demographic picture informs Moody’s Deputy Chief Economist Cristian deRitis’s view that the nation cannot simply “build our way out of this” housing conundrum. Homebuilders, aware of these long-term trends, have little incentive to flood the market with new inventory.
Even with the president’s efforts nudging rates into the high-5% range, Morgan Stanley anticipates negligible impact on housing supply. Homeowners holding mortgages at 3% or 4% find little financial rationale to sell their current property and then finance a new purchase at a higher rate. The firm’s analysts explicitly stated that while affordability might improve for a marginal buyer, this does not translate into “unlocking” substantial additional supply. Consequently, Morgan Stanley only slightly adjusted its year-end 2026 mortgage rate forecast from 5.75% to 5.6%, predicting only a “fractional” increase in existing home sales and no change in its 2% annual home price appreciation forecast.
The administration’s frustration with the Federal Reserve, particularly Chairman Jerome Powell, for maintaining what it considers excessively high interest rates, underscores the perceived urgency of the housing crisis. Housing director Bill Pulte’s strong criticisms of Powell reflect the White House’s perspective that high interest rates are a primary barrier. Yet, the challenges extend beyond monetary policy. Sean Dobson, CEO of The Amherst Group, a significant institutional investor, argues that blaming institutional ownership for affordability issues misidentifies both the problem and its solution. He attributes the crisis to “years of policy failure,” rather than the activities of institutional players, who, in any case, own a relatively small portion of the housing stock and have recently been reducing their holdings.
The path to widespread affordability, as Dobson outlined, would require drastic changes: either a roughly one-third drop in home prices, a reduction of interest rates to 4.6%, or a 55% increase in buyer income. Morgan Stanley suggests that additional governmental levers, such as reducing GSE guarantee fees or lowering risk weights on conventional mortgages, could potentially shave another 50 basis points off mortgage rates. However, a return to the 4% range seen in the 2010s would necessitate a significant shift in Treasury rates, beyond the scope of GSE actions alone. The report ultimately concludes that the U.S. housing market’s affordability issues are complex and lack any single, simple remedy.
