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Our Co-Heads of Securitized Products Research Jay Bacow and James Egan explain how mortgage rates, tariffs and stock market volatility are affecting the U.S. housing market.Read more insights from Morgan Stanley. ----- Transcript -----Jay Bacow: Welcome to Thoughts on the Market. I'm Jay Bacow, co-head of Securitized Products Research at Morgan Stanley.James Egan: And I'm Jim Egan, the other co-head of Securitized Products Research at Morgan Stanley. And today we're here to talk about all of the headlines that we've been seeing and how they impact the U.S. housing market.It's Thursday, April 24th at 9am in New York.Jay Bacow: Jim, there are a lot of headlines right now. Mortgage rates have decreased about 60 basis points from the highs that we saw in January through the beginning of April. But since the tariff announcements, they've retraced about half of that move. Now, speaking of the tariffs, I would imagine that's going to increase the cost of building homes.So, what does all of this mean for the U.S. housing market?James Egan: On top of everything you just mentioned, the stock market is down over 15 per cent from recent peaks, so there is a lot going on these days. We think it all has implications for the U.S. housing market. Where do you want me to start?Jay Bacow: I think it's hard to have a conversation these days without talking about tariffs, so let's start there.James Egan: So, we worked on the impacts of tariffs on the U.S. housing market with our colleagues in economics research, and we did share some of the preliminary findings on another episode of this podcast a couple weeks ago. Since then, we have new estimates on tariffs, and that does raise our baseline expectation from about a 4 to 5 per cent increase in the cost of materials used to build a home to closer to 8 per cent right now.Jay Bacow: Now I assume at least some of that 8 per cent is going to get pushed through into home prices, which presumably is then going to put more pressure on affordability. And given the – I don't know – couple hundred conversations that you and I have had over the past few years, I am pretty sure affordability's already under a lot of pressure.James Egan: It is indeed. And this is also coming at a time when new home sales are playing their largest role in the U.S. housing market in decades. New home sales, as a percent of total, make up their largest share since 2006. New homes for sale – so now talking about the inventory piece of this – they’re making up their largest share of the homes that are listed for sale every month in the history of our data. And that's going back to the early 1980s.Jay Bacow: And since presumably the cost of construction is much higher on a new home sale than an existing home sale, that's going to have an even bigger impact now than it has when we look to the history where new home sales were making up a much smaller portion of housing activity.James Egan: Right, and we're already seeing this impact come through on the home builder side of this, specifically weighing on home builder sentiment and single unit building volumes. Through the first quarter of this year, single unit housing starts are down 6 per cent versus the first quarter of 2024.Jay Bacow: All right. And we're experiencing a housing shortage already; but if building volumes are going to come down, then presumably that puts upward pressure on home prices. Now, Jim, you mentioned home builder sentiment. But there's got to be home buyer sentiment right now. And that can't feel very good given the sell off in equity markets and what that does with home buyer's ability to afford to put down money for down payment. So how does that all affect the housing market?James Egan: Now that's a question that we've been getting a lot over the past couple weeks. And to answer it, we took a look at all of the times that the stock market has fallen by at least 20 per cent over the past few decades.Jay Bacow: I assume when you looked at that, the answers weren't very good.James Egan: You know, it depends on the question. We identified 10 instances of at least a 20 per cent drawdown in equity markets over the past few decades. For eight of them, we have sufficient home price data. Outside of the Global Financial Crisis (GFC), which you could argue was a housing led global recession, every other instance saw home prices actually climb during the equity market correction.Jay Bacow: So, people were buying homes during a drawdown in the equity market?James Egan: No home prices were climbing. But in every instance, and here we can go back a little bit further, sales declined during the drawdown. Now, once stock markets officially bottomed, sales climbed sharply in the following 12 months. But while stock prices were falling, so were sales.And Jay, at the top of this podcast, you mentioned mortgage rate volatility. That matters a lot here…Jay Bacow: Can you elaborate on why I said something so ...