On a national basis, home prices fell 1.3% between June and August. That marked the first decline measured by the lagged Case-Shiller National Home Price Index since 2012.

It’s more than just a small dip, it’s a trajectory shift. At least that’s according to the latest forecast produced by the economics team at Morgan Stanley.

This year, Morgan Stanley expects US home prices, as measured by the Case-Shiller Index, to finish with a year-over-year increase of 4%. But when considering that the Case-Shiller Index was up 8.9% through the first six months of 2022, that means Morgan Stanley expects US home prices to fall by around 5%—including the 1.3% dip between June and August—in the second half of 2022.

The home price correction won’t stop there. Morgan Stanley expects US home prices, as measured by the Case-Shiller Index, to fall another 4% in 2023. In total, the Wall Street bank expects home prices to fall around 10% between June 2022 and the bottom in 2024. (Previously , Morgan Stanley had been predicting a 7% peak-to-through decline in US home prices).

The last housing correction, which saw US home prices fall 27% between 2006 and 2012, was anchored by high unemployment, “pressurized” affordability, shady mortgage products, and a supply of glut. This time around, we just have what Fortune calls “pressurized” affordability: Frothy home prices coupled with spiked mortgage rates.

“The median price of existing home sales is up 38% since March 2020. Mortgage rates are up over 300 bps [3 percentage points] in the past eight months, the first time we have seen anything like that since 1980/81. The combination of the two has caused affordability to deteriorate faster than at any point in our time series,” wrote Morgan Stanley researchers.

Heading forward, three levers can help “depressurize” affordability, according to the bank. First, if inflation decelerates and financial conditions loosen, that would in theory push mortgage rates lower and thus improve affordability. Second, rising incomes (which are up 4.4% year-over-year) could improve affordability. Third, home prices continuing to fall would help “depressurize” affordability. As long as affordability remains “pressurized,” Morgan Stanley expects that third lever to get pulled.

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“Until this point, we have focused on housing forecasts up until the end of 2023, but we do not believe December 2023 will be the bottom for home prices. It is not a groundbreaking statement to say that the trajectory of home prices into 2024 and beyond is filled with more than a little uncertainty,” the researchers wrote.

Let’s take a deeper look at Morgan Stanley’s latest housing outlook.

Tight inventory won’t stop home prices from falling—but it could create a floor

The ongoing affordability shock—of frothy home prices coupled with spiked mortgage rates—has seen a demand crater. On a year-over-year basis, mortgage purchase applications are down 40.7%. However, it hasn’t translated into surging supply levels: Inventory levels in October were 37.6% below October 2019 levels.

View this interactive chart on Fortune.com

“Supply conditions historically argue [for] climbing home prices from here. If we are below 6 months of total supply, annual home price growth has never turned negative within the next six months going back to the beginning of this Case-Shiller Index in the late 1980s. We currently sit at just 3.9 months of supply,” wrote Morgan Stanley researchers.

But this time could be different: The ongoing affordability strain could see home prices fall even though inventory remained tight. (Here’s the Moody’s Analytics outlook for the nation’s 322 largest markets.)

“The fact that we expect home prices to start falling on an annual basis in March 2023 despite tight inventories reflects how unprecedented this affordability situation is in the US housing market,” wrote Morgan Stanley. “However, although supply doesn’t keep home price growth floored at zero, we do believe it prevents home price declines from becoming too large.”

bull case: Home prices stop falling in 2023

Peak-to-through, Morgan Stanley expects US home prices to fall 10% through 2024. However, there’s a “bull” case where the firm believes US home prices don’t fall in 2023 and the peak-to-through decline comes in around 5%.

There are two key pillars to Morgan Stanley’s “bull” case: Tighter than expected inventory levels and lower than expected mortgage rates.

“In a bull case, the lock-in effect keeps inventories at the lows we have experienced in the past year. At the same time, lower mortgage rates incentivize more purchase demand than we are currently expecting as households view any rally as a potentially temporary reprieve and move to take advantage before the next move higher,” wrote Morgan Stanley researchers.

In 2023, Morgan Stanley expects 30-year fixed mortgage rates to average 6.2%. However, if the Fed successfully tames inflation sooner than expected, loosened financial conditions could see mortgage rates fall below 6%. Meanwhile, if the so-called lock-in effect (meaning homeowners who don’t want to sell and give up their 2% or 3% mortgage rate) continues into 2023, it could make inventory levels tighter than Morgan Stanley currently expects.

Bear case: Home prices crash 20%

If a “deep” recession manifests, Morgan Stanley predicts US home prices could crash 20% from peak-to-through—including up to an 8% decline in home prices in 2023 alone.

“A common scenario that we are presented with when discussing the bear case for home prices is a longer and deeper recession leading to a material increase in unemployment,” wrote Morgan Stanley researchers. “What we think would be a more likely cause of a home price bear case would be an intersection of weaker-than-expected demand with a larger increase in inventories than currently forecast.”

But even if this “bear” scenario were to manifest, Morgan Stanley doesn’t think it’d be a full-blown repeat of the 2008 crash.

“While this [our bear case] would understandably be negative for the housing market, we continue to believe that the health of credit standards should keep a ceiling on how high true distressed transactions can climb. Additionally, a mortgage servicing industry that is far more practiced in offering borrowers foreclosure alternatives (eg, modifications) should keep more borrowers in their homes as opposed to forcing a liquidation event,” wrote Morgan Stanley researchers.

Want to stay updated on the housing correction? Follow me on Twitter at @NewsLambert.

This story was originally featured on Fortune.com

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