On the one hand, the 2.4% decline in US home prices seen between June and October pales in comparison to the 26% decline in the nation’s home prices from the 2007 peak to the 2012 trough. On the other hand, the current house price correction may have a lot of gas in the tank.
Look no further than last week’s Goldman Sachs magazine headline, “It Gets Worse Before It Gets Better.” Researchers at the investment bank argued in a paper that the national correction in house prices will continue until 2023.
“We are lowering our 2023 year-over-year forecast for the Case-Shiller home price index to -6.1% from -4.1% previously.” This would represent an aggregate drop in US housing prices of roughly 10% from peak to peak to the end of this year from June 2022,” Goldman Sachs researchers wrote.
Through October, the Case-Shiller National Home Price Index registered a -2.4% decline in national home prices. However, researchers at the investment bank estimate that when we get readings in November and December, we will see that national home prices have already fallen -4%. That means we may already be halfway to Goldman Sachs’ estimated 10% peak-to-trough drop.
Nationally, a 10% peak-to-trough drop in U.S. home prices — which rose 41% between March 2020 and June 2022 — shouldn’t cause too much financial damage, Goldman Sachs says. However, the company says some regional markets won’t be so lucky.
“This [national] the decline should be small enough to avoid major mortgage stress, with a sharp increase in foreclosures across the country looking unlikely. However, overheated housing markets in the Southwest and Pacific Coast, such as San Jose MSA, Austin MSA, Phoenix MSA and San Diego MSA, will likely struggle with peak-to-trough declines of over 25%, posing a localized risk of higher delinquencies for mortgages originated in 2022 or at the end of 2021,” writes Goldman Sachs.
In 2023, Goldman Sachs expects double-digit home price declines in major markets such as Austin (-15.6), San Francisco (-13.7%), San Diego (-13.4%), Phoenix (-12.9 %), Denver (-11.4%) ), Seattle (-11.2%), Tampa (-11.2%) and Las Vegas (-11.1%). Those markets are also where the home price correction hit the hardest in the second half of 2022. Indeed, through November, Austin was down 10.4% from its 2022 home price peak.
Why does Goldman Sachs expect the correction to hit markets like San Diego and Austin the hardest? The investment bank says those markets are “overheated,” implying that housing price growth has become too detached from fundamentals during the pandemic housing boom. Detachment from fundamentals takes a particularly hard hit when mortgage rates rise as they have in 2022.
Going forward, Goldman Sachs thinks many markets in the Northeast, Southeast and Midwest could see milder corrections (if any at all). In 2023, the investment bank expects home prices to barely fall in places like Chicago (-1.8%) and New York (-0.3%), while its forecast calls for rising home prices in Baltimore (+0. 5%) and Miami (+0.8%) ) in 2023.
“Our revised forecast for 2023 primarily reflects our view that interest rates will remain at elevated levels longer than currently estimated, with 10-year Treasury yields peaking in Q3 2023. As a result, we are raising our forecast for 30-year fixed mortgage rates at 6.5% by the end of 2023 (a 30 basis point increase from our previous expectations),” Goldman Sachs researchers wrote. “This road would cause accessibility to gradually deteriorate, after a slight improvement over the past two months.”
While the investment bank expects U.S. home prices to fall 6.1% in 2023, it doesn’t expect a prolonged decline like the previous crash: In 2024, Goldman Sachs expects U.S. home prices to rise 1% even as markets like Austin and Phoenix continue to fall.
“Assuming the economy remains on a soft landing path, avoiding a recession, and the 30-year fixed mortgage rate falls to 6.15% by the end of 2024, home price growth is likely to shift from depreciation to below-trend appreciation in 2024” , writes Goldman Sachs.
Whether it’s Goldman Sachs’ forecast or Moody’s outlook, the biggest wild card for any home price prediction model remains mortgage rates. (You can find the latest home price forecasts from 27 of the nation’s leading real estate research companies here.)
At its peak in November, the average 30-year fixed mortgage rate, measured by the daily mortgage rate, was 7.37%. However, after positive news on the inflation front over the past few months, financial conditions have eased and the average 30-year fixed mortgage rate has fallen to 6.09%. If mortgage rates continue to fall, companies like Goldman Sachs may have to start upgrading their outlook on home prices.
Looking for more housing information? Follow me on Twitter at @NewsLambert.
Learn how to manage and build trust in your business with The Trust Factor, a weekly newsletter that examines what leaders need to succeed. Apply here.