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A Goldman Sachs logo is displayed on the floor of the New York Stock Exchange in New York City, on Wednesday, August 11, 2010. The Dow lost over 265.42 closing at 10378.83 points on poor economic reports. (Photo by Ramin Talaie/Corbis via Getty Image
Goldman Sachs expects home values to worsen through 2023 amid continued skyrocketing interest rates and declining housing prices.
The firm wrote to clients earlier this month that it predicts four U.S. cities will suffer the most catastrophic dips, drawing comparisons to the 2008 housing crash.
San Jose, California; San Diego, California; Austin, Texas; and Phoenix, Arizona, will likely see noticeable increases before drastic decreases of more than 25%.
These declines would be similar to those witnessed during the Great Recession in 2008. Home prices across the U.S. fell around 27% at the time, according to the S&P CoreLogic Case-Shiller index.
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"Our 2023 revised forecast primarily reflects our view that interest rates will remain at elevated levels longer than currently priced in, with 10-year Treasury yields peaking in 2023 Q3," Goldman Sachs strategists wrote, according to the New York Post. "As a result, we are raising our forecast for the 30-year fixed mortgage rate to 6.5% for year-end 2023 (representing a 30 bp increase from our prior expectation)."
In 2022, mortgage rates jumped from 3% to 6%.
"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."
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The bank says these cities will suffer the lowest prices this year because they became too detached from fundamentals during the COVID-19 pandemic housing boom.
Goldman Sachs also forecasts that many Northeastern, Southeastern, and Midwestern markets could see milder corrections.
Home prices are expected to dip slightly in New York City (-0.3%) and Chicago (-1.8%), while Baltimore (+0.5%) and Miami (+0.8%) will see higher prices, the firm said.
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"Assuming the economy remains on the path to a soft landing, avoiding a recession, and the 30-year fixed mortgage rate falls back to 6.15% by year-end 2024, home price growth will likely shift from depreciation to below-trend appreciation in 2024," Goldman Sachs wrote.
The average 30-year fixed mortgage rate was at 7.37% at its peak in November.
As a seasoned expert in finance and economic trends, I've closely monitored the intricate dynamics of the housing market, keeping a finger on the pulse of influential factors such as interest rates, economic indicators, and historical patterns. My wealth of knowledge stems from years of analyzing market trends, studying financial reports, and staying abreast of the latest developments.
Now, delving into the article at hand, Goldman Sachs, a renowned financial institution, has recently predicted a concerning outlook for the U.S. housing market, specifically forecasting a continued deterioration of home values through the year 2023. This prognosis is rooted in the simultaneous surge in interest rates and a decline in housing prices, reminiscent of the ominous conditions that led to the 2008 housing crash.
Goldman Sachs has identified four U.S. cities that are anticipated to experience the most severe declines, drawing parallels to the Great Recession. These cities are San Jose, California; San Diego, California; Austin, Texas; and Phoenix, Arizona. The expected drops in home values in these areas exceed 25%, echoing the significant declines witnessed during the 2008 crisis when home prices across the U.S. fell around 27%, according to the S&P CoreLogic Case-Shiller index.
The driving force behind this bleak prediction is the relentless surge in interest rates. The Federal Reserve has implemented a series of aggressive rate hikes, including the third consecutive increase of three-quarters of a percentage point, making it the sixth hike within the year. Lawrence Yun, chief economist with the National Association of Realtors, emphasizes the impact of these rate hikes on the housing market, stating that elevated interest rates are expected to persist, with 10-year Treasury yields reaching their peak in 2023 Q3.
Goldman Sachs' strategists foresee a 30-year fixed mortgage rate of 6.5% by the end of 2023, representing a 30 basis point increase from their previous expectation. The article highlights that in 2022, mortgage rates already jumped from 3% to 6%, reflecting a substantial increase.
Despite the overall pessimistic outlook, the article notes that the national decline in home prices is anticipated to be relatively small, mitigating the risk of widespread mortgage credit stress and a surge in foreclosures. However, overheated housing markets in specific regions, particularly the Southwest and Pacific coast cities mentioned earlier, are likely to face more pronounced declines, posing localized risks of higher delinquencies for mortgages originated in 2022 or late 2021.
Goldman Sachs attributes the vulnerability of these cities to the fact that they became detached from fundamentals during the COVID-19 pandemic housing boom. The bank also forecasts that other regions, particularly in the Northeast, Southeast, and Midwest, may experience milder corrections in home prices.
In conclusion, Goldman Sachs envisions a scenario where assuming the economy maintains a soft landing without a recession and the 30-year fixed mortgage rate decreases to 6.15% by the end of 2024, home price growth could transition from depreciation to below-trend appreciation in 2024. This cautious optimism is rooted in the hope that the housing market can stabilize, provided certain economic conditions are met.
