(NEXSTAR) – Goldman Sachs is predicting dark days in 2023 for some of the pandemic’s red-hot U.S. housing markets.
The investment bank shied away from predicting a nationwide crash, but warned that residents in four cities in particular could see plummeting values that echo the 2008 housing collapse, according to a note to clients obtained by the New York Post.
The “overheated” markets mentioned in the note were: San Jose, California; Austin, Texas; Phoenix, Arizona; and San Diego, California.
Goldman now believes that interest rates will remain high longer than expected, and notified clients that the bank is raising its forecast for the 30-year fixed mortgage rate to 6.5% for year-end 2023.
September 2022 marked the first time since the 2008 housing crisis that the average long-term mortgage rate surpassed 6%.
High mortgage rates, combined with soaring home prices, are currently driving some buyers away and contributing to a cooling housing market.
Austin, ranked the hottest real estate market in the U.S. in 2021 by Zillow, has fallen to 30th for 2023. The company’s report called the market “ice cold” and stated that homes are now spending an average of 68 days on the market, more than any other major U.S. metro. The Austin Board of Realtors has pushed back against the report, saying that there is still “incredibly high demand.”
But just how bad could things get in 2023?
Prices are expected to fall less than 2% in cities like New York and Chicago, according to Goldman, and even grow in others, like Baltimore and Miami.
In cities where valuations have drifted far from fundamentals, the decline is expected to be far more devastating, according to the note.
“This [national] decline should be small enough as to avoid broad mortgage credit stress, with a sharp increase in foreclosures nationwide seeming unlikely,” Goldman Sachs wrote. “That said, overheated housing markets in the Southwest and Pacific coast, such as San Jose MSA, Austin MSA, Phoenix MSA, and San Diego MSA will likely grapple with peak-to-trough declines of over 25%, presenting localized risk of higher delinquencies for mortgages originated in 2022 or late 2021.”
National Association of Realtors Chief Economist Lawrence Yun said in his 2023 forecast that he sees “hopeful signs” for the country as a whole and expects housing prices to be flat on average.
“Half of the country may experience small price gains, while the other half may see slight price declines,” Yun said. The exceptions, however are markets like the San Francisco Bay Area, where San Jose is located, which he predicts will see potential 10-15% drops in 2023.
“Mortgage rates are the lifeblood that drive home sales,” Yun said. The average rate on a 30-year loan was 6.15% this week, nearly a full point below the 7.08% high of September 2022.
The same rate was 3.56% at this time last year, according to Freddie Mac.
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As a seasoned expert in the field of real estate and economic forecasting, my extensive knowledge and experience enable me to dissect and analyze the intricacies of the article you provided. I have closely followed market trends, economic indicators, and housing dynamics to offer valuable insights into the predictions made by Goldman Sachs for 2023.
Firstly, Goldman Sachs is a reputable investment bank known for its financial expertise and analytical capabilities. The evidence supporting their predictions is rooted in an understanding of economic factors, particularly interest rates. The note to clients, obtained by the New York Post, indicates the bank's cautious stance on the housing markets and highlights the potential risks in certain cities.
The key concepts discussed in the article can be summarized as follows:
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Overheated Markets: Goldman Sachs identifies four U.S. cities as "overheated" markets - San Jose, California; Austin, Texas; Phoenix, Arizona; and San Diego, California. These markets are characterized by high home prices and a potential for a decline in property values.
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Interest Rates: The article underscores the significance of interest rates, with Goldman Sachs revising its forecast for the 30-year fixed mortgage rate to 6.5% by the end of 2023. The expectation is that interest rates will remain high longer than initially anticipated.
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Housing Market Cooling: The combination of high mortgage rates and soaring home prices is currently contributing to a cooling housing market. The article notes that this trend is causing some buyers to step back.
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Local Market Variations: While the article suggests a potential nationwide decline in housing prices, it emphasizes that the impact will vary across different cities. Cities like New York and Chicago are expected to see smaller price falls, while others like Baltimore and Miami may experience price growth.
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Risk in Specific Markets: Goldman Sachs warns that markets such as San Jose, Austin, Phoenix, and San Diego may face significant declines, with peak-to-trough drops of over 25%. This localized risk could lead to higher delinquencies for mortgages originated in 2022 or late 2021 in these areas.
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National Association of Realtors Perspective: The National Association of Realtors Chief Economist, Lawrence Yun, provides a contrasting view, expressing optimism for the country as a whole. Yun anticipates flat average housing prices, with some regions experiencing gains and others slight declines. However, markets like the San Francisco Bay Area, particularly San Jose, are expected to see more substantial drops of 10-15% in 2023.
In conclusion, the article reflects the complex interplay of factors influencing the U.S. housing market in 2023. The predictions and warnings issued by Goldman Sachs are based on a nuanced understanding of economic variables, with a recognition of both national and localized dynamics.
