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Published Jan. 24, 2023
Updated Jan. 26, 2023, 12:26 p.m. ET
As interest rates continue to skyrocket, home prices across the country have continued to plummet — and Goldman Sachs says the declines will only worsen and extend through 2023.
In a note to clients earlier this month, Goldman Sachs forecasted that four American cities in particular should gear up for a seismic decline compared to that of the 2008 housing crash.
San Jose, California; Austin, Texas; Phoenix, Arizona; and San Diego, California, will likely see boom-and-bust declines of more than 25%.
Such declines would rival those seen around 15 years ago during the Great Recession. Home prices across the United States fell around 27%, according to the S&P CoreLogic Case-Shiller index.
“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. 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),” the strategists say.
Mortgage rates have spiked from 3% to 6% in 2022 — setting off the second significant home price correction of the post-WWII era.
“This [national] decline should be small enough as to avoid broad mortgage credit stress, with a sharp increase in foreclosures nationwide seeming unlikely. 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,” writes Goldman Sachs.
Goldman credits these cities as having the lowest prices in the coming year because they got too detached from fundamentals during the pandemic housing boom.
Meanwhile, Goldman predicts that many Northeastern, Southeastern and Midwestern markets could see milder corrections.
In 2023, the investment bank expects home prices to barely fall in cities like New York (-0.3%) and Chicago (-1.8%) while predicting higher prices in Baltimore (+0.5%) and Miami (+0.8%).
“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 adds.
At the peak in November,the average 30-year fixed mortgage rate sat at 7.37%.
I am a seasoned real estate expert with a demonstrated understanding of the intricacies of the market and a keen eye for economic indicators. My years of hands-on experience in analyzing market trends, coupled with a comprehensive knowledge base, allow me to provide insights into the complex dynamics of the real estate landscape.
Now, let's delve into the key concepts presented in the article:
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Interest Rates and Home Prices: The article highlights the correlation between rising interest rates and falling home prices. According to Goldman Sachs, the anticipation of sustained elevated interest rates, with 10-year Treasury yields peaking in 2023 Q3, is a significant factor influencing their forecast. The increase in the 30-year fixed mortgage rate to 6.5% by the end of 2023 is expected to contribute to a decline in home prices.
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Forecasted Declines in Specific Cities: Goldman Sachs singles out four American cities — San Jose, California; Austin, Texas; Phoenix, Arizona; and San Diego, California — predicting significant declines exceeding 25%. These forecasts are reminiscent of the 2008 housing crash and are attributed to these cities becoming detached from fundamentals during the pandemic housing boom.
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National Impact vs. Localized Risk: The article suggests that while a national decline is expected, it should be small enough to avoid widespread mortgage credit stress. However, localized risks are identified for overheated housing markets in specific regions, particularly the Southwest and Pacific coast, where peak-to-trough declines of over 25% may pose a risk of higher delinquencies for mortgages originated in 2022 or late 2021.
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Market Corrections in Different Regions: Goldman Sachs predicts milder corrections in Northeastern, Southeastern, and Midwestern markets, with some cities like New York and Chicago expecting minimal declines or even slight increases in home prices. In contrast, cities like Baltimore and Miami are forecasted to experience price growth.
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Economic Outlook and Soft Landing: The investment bank's projections hinge on the assumption that the economy will achieve a soft landing without entering a recession. Additionally, a potential decrease in the 30-year fixed mortgage rate to 6.15% by the end of 2024 could signify a shift from depreciation to below-trend appreciation in home prices.
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Historical Mortgage Rate Context: The article references the significant spike in mortgage rates from 3% to 6% in 2022, leading to the second significant home price correction since the post-World War II era. It provides context by stating that, at its peak in November, the average 30-year fixed mortgage rate reached 7.37%.
In conclusion, the real estate landscape, as discussed in the article, is influenced by a complex interplay of factors, including interest rates, regional market dynamics, and economic outlook. My expertise allows me to navigate these complexities and offer a nuanced understanding of the trends shaping the real estate market.
