Over the past few years, homebuyers suffered a one-two punch of two-decade-high mortgage rates and record-low inventory, but housing experts are predicting a reprieve next year.

“As we sit atop our year-ahead outlook perch, the evolution of the U.S. housing market has been Herculean or devastating depending on where you look,” Morgan Stanley strategists wrote in a recent report.

“We think we are poised for an improvement in affordability that we have only seen a handful of times over the past ~35 years,” they said.

Morgan Stanley predicts a decline in mortgage rates and an increase in housing inventory as pent-up sellers break free from so-called “golden handcuffs” and begin listing their homes.

And while sales of both new and existing homes continue to grow, analysts forecast single-unit starts could climb another 10% next year, adding to the supply of available housing.

With inventory constraints easing, they believe prices could come down by about 3% next year.

Lower mortgage rates and more supply

Although mortgage rates approached 8% in October for the first time since 2000, they’ve been creeping down since, dipping to a two-month low of 7.29% last week.

The decline will likely extend into next year with a growing chorus of economists expecting the Fed to throw in the towel and cut rates.

National Association of Realtors (NAR) economist Lawrence Yun predicts rates will hover between 6-7% by next spring and points to an increase in new construction, ushering buyers and sellers back into the market.

"Pent-up sellers cannot wait any longer. People will begin to say, ‘life goes on,'" Yun says. "Listings will steadily show up, and new home sales will continue to do well. Existing home sales will rise by 13.5% next year."

The Mortgage Bankers Association also forecasts demand to pick up in 2024, with total mortgage origination volume increasing 19% in 2024.

Lower rates could be a double-edged sword for prices

Morgan Stanley sees two potential outcomes for housing prices next year.

One, if mortgage rates slide from their peak this year, the housing market could see demand ramp up, pushing prices up another 5% in 2024.

On the other hand, if mortgage rates remain high and the U.S. enters a recession, that will scare off homebuyers and home prices will recede more.

Fannie Mae forecasts a mild and brief recession in 2024. "The economy is now slowing," said Doug Duncan, Fannie Mae senior vice president and chief economist.

"The slowdown in employment gains has continued, and stress is growing on consumers' ability to sustain their high levels of spending.”

Although real GDP grew at a 4.9% annual pace in the third quarter, the job market is softening. Real personal incomes increased at just a 0.6% pace during the same period, and the personal savings rate is steadily falling.

After a summer of strong spending, it’s highly possible consumers will pull back now that their savings are running out.

But regardless of whether the U.S. enters a recession, Fannie Mae expects mortgage rates to trend downward next year, averaging 6.8% by the fourth quarter.

The analysts predict home sales to decline further in the near future but bottom out in early 2024 and gradually recover into the following year.