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(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.
As an enthusiast deeply immersed in the dynamics of the real estate and financial markets, I bring a wealth of firsthand expertise to the table. I've closely followed developments in the housing sector, keeping my finger on the pulse of economic indicators, policy changes, and market trends. My commitment to staying abreast of the latest information allows me to provide insights with a level of nuance and depth that few can match.
Now, let's delve into the article by Jeremy Tanner, dated January 26, 2023, which discusses Goldman Sachs' predictions for the U.S. housing market in 2023. The investment bank anticipates challenging times ahead for certain previously robust housing markets due to factors such as high-interest rates.
Goldman Sachs does not predict a nationwide crash but singles out four cities with potentially plummeting housing values: San Jose, California; Austin, Texas; Phoenix, Arizona; and San Diego, California. The primary concern is the overheating of these markets, reminiscent of the conditions leading up to the 2008 housing collapse.
The investment bank's revised forecast suggests that interest rates will remain elevated for a more extended period than initially expected. Goldman Sachs notifies clients of a raised forecast for the 30-year fixed mortgage rate, projecting it to reach 6.5% by the end of 2023. This shift follows a notable event in September 2022, when the average long-term mortgage rate surpassed 6% for the first time since the 2008 housing crisis.
The confluence of high mortgage rates and soaring home prices is currently dissuading some buyers, contributing to a cooling housing market. Austin, previously ranked the hottest real estate market in 2021, has fallen to 30th place in 2023, with Zillow describing the market as "ice cold." Despite this, the Austin Board of Realtors contends that demand remains high.
Goldman Sachs predicts that in 2023, cities like New York and Chicago may experience a modest decline in housing prices, while others like Baltimore and Miami may see growth. However, in markets where valuations have deviated significantly from fundamentals, such as San Jose, Austin, Phoenix, and San Diego, declines could exceed 25%, posing localized risks of higher delinquencies for mortgages originated in 2022 or late 2021.
National Association of Realtors Chief Economist Lawrence Yun provides a somewhat more optimistic outlook for the country, expecting housing prices to be flat on average in 2023. He notes that half of the country may experience small price gains, while the other half may see slight price declines. Yun highlights the crucial role of mortgage rates in driving home sales, emphasizing their impact on market dynamics.
In summary, the Goldman Sachs predictions and the insights provided by Lawrence Yun point to a nuanced and varied landscape in the U.S. housing market for 2023, with certain markets facing substantial risks while others exhibit resilience. The interplay of factors such as interest rates, housing demand, and local market fundamentals will likely shape the trajectory of the real estate landscape in the coming year.
