The reversal, made in a research note earlier this week, comes as mortgage rates continue to rise, hitting 8%, the highest level since 2000. The increase has had a profound impact on the housing market, but not necessarily as many people had expected. 

For one thing, it’s keeping the supply of homes for sale tight largely due to the lock-in effect, which prevents homeowners that have lower mortgage rates from selling because it would require buying a new home at a much higher interest rate. That’s helping to prop up the market by creating big demand for the relatively few houses for sale, further deteriorating affordability. 

By Morgan Stanley’s calculation, the monthly payment on a median-priced home is up 27% over the past year. But that’s using a slightly outdated 7.12% mortgage rate. If calculated using the current 8% rate, the monthly payment would be up 38% over the same period. If mortgage rates stay at 8%, “affordability deterioration would return to the most severe we have seen in decades, the 2022 experience notwithstanding,” Morgan Stanley warned. 

The record growth in home prices during the pandemic coupled with higher mortgage rates led to a severely unaffordable housing market that is “unlike anything we have seen in decades,” the analysts said. The year-over-year decline in affordability was “three times worse” than it was during the years leading to the Great Financial Crisis in the early 2000s, they said. 

The mortgage rate shock, after rates hovered around 3% for some time, has led to a retreat in supply in an already underbuilt housing market. Existing home listings hit a new reported low in August, the Morgan Stanley strategists said. Homebuilder confidence has taken a hit as mortgage rates have risen relentlessly, they added, which could result in fewer homes being built. However, the analysts suggest the impact of higher mortgage rates on home sales will be less severe than last year because they don’t necessarily see the number of home sales declining sharply. Nonetheless, declines in inventory will put upward pressure on home prices in the short term, they wrote. 

At the beginning of this year, Morgan Stanley analysts had a far dimmer view of the housing market over the next couple of years. They expected home prices to fall 10% between June 2022 and 2024. In the case of a deep recession, the analysts predicted an even bigger crash in which home prices would tumble 20% in a peak-to-trough decline, falling 8% in 2023 alone. 

But their latest, more optimistic prediction is that prices will be anywhere between flat for the year and up 5%, likely depending on how long mortgage rates stay at 8% and the effect of that on housing activity. Morgan Stanley analysts did not give an average home price or say what they expect it to be at the end of the year, but as of the second quarter of this year, the median sales price for houses sold in the U.S. was just over $416,000.

Morgan Stanley isn’t the only financial institution to suggest home prices will likely increase. Roger Ashworth, a managing director at Goldman Sachs, recently wrote that despite affordability being worse than in the 2008 housing crash, housing itself is in a much stronger position, largely due to a low supply of homes for sale. 

“Absent any negative shocks to the broader economy that would either boost excess supply of homes on the market or fuel an uptick in unemployment, we continue to expect home prices to rise at a slow pace,” he wrote. And he predicts that by the end of this year, home prices will rise 1.8%, with a 3.5% increase by the end of 2024. 

As for 8% mortgage rates, Mark Fleming, chief economist at First American, recently told Fortune, they could continue to climb, or simply hover around that level, throughout the end of this year.