According to Goldman Sachs, home prices will plummet this year, with San Jose, Austin, Phoenix and San Diego staring at the barrel with 25% boom-to-bust declines.
The Fed’s ongoing inflationary war, which sent mortgage rates soaring from 3% to 7% in 2022, has stalled the housing market and triggered the biggest price correction since the 2008 crash.
Goldman warned investors earlier this month in a research report titled “It’s Getting Worse Before It Gets Better” that housing markets in the Southwest and Pacific Coast were particularly overheated.
While Goldman’s outlook for the national housing market is less gloomy, with prices falling 6% this year before rising next year, certain cities could see a sharp drop in property valuations.
San Jose, Austin, Phoenix and San Diego are expected to be hit with peak-to-trough declines of 25%, which would rival the global financial crisis of 2007-08, which saw home prices collapse nationwide by 27%.
Goldman Sachs released its 2023 home valuation forecast, forecasting that the overheated West Coast and Southwest markets will see sharp corrections
For 2023, Goldman forecasts a double-digit decline in home prices in key 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%).
Austin fell 10.4% from its 2022 peak, meaning the boom-to-bust decline could be over 25% if the trend continues this year.
Milder price corrections are expected in the Northeast, Southeast and Midwest.
The bank forecasts a slight decline in house prices in Chicago (-1.8%) and New York (-0.3%) in 2023.
Slight increases are expected in Baltimore (+0.5%) and Miami (+0.8%) over the same period.
Overall, Goldman forecasts US home prices to fall 6.1% this year. That would mean a total peak-to-trough decline in U.S. home prices of around 10% by the end of this year from June 2022.
Home prices in Austin (above) are expected to fall 15.6% this year, meaning the overall drop could be over 25% from last year’s peak.
A “For Sale” sign outside a home in Phoenix, Arizona, can be seen in a file photo. Goldman forecasts that Phoenix home prices will fall another 12.9% this year
‘This [national] The drop should be small enough to avoid a general mortgage strain, with a sharp rise in foreclosures across the country looking unlikely,” the report said.
That means the boom-to-bust crash isn’t expected to be half as bad as the 2008 meltdown, except perhaps in the Southwest and Pacific Coast.
The investment bank is also offering a glimmer of hope as it believes the housing market will not experience a long-term downturn like it did in 2008.
Goldman forecasts an overall increase in house prices of about 1% in 2024.
“Assuming the economy stays on track for a soft landing, avoids a recession, and the 30-year fixed-rate mortgage rate falls back to 6.15% by the end of 2024, home price growth is likely to shift from devaluation to devaluation below-trend appreciation postponed to 2024,” the bank said.
Mortgage rates remain unpredictable – they peaked at 7.37% in November – the average 30-year fixed-rate mortgage fell to 6.09% after better-than-expected inflation numbers.
The sharp rise in mortgage rates over the past year has choked the housing market, with existing home sales falling for 10 straight months to their lowest level in more than a decade.
A chart showing the evolution of US 30-year mortgage rates between September 2022 and January 2023
A For Sale sign stands in front of a home in Wyndmoor, Pennsylvania, Wednesday, June 22, 2022
Although house prices have fallen due to lower demand, they are still almost 11% higher than a year ago.
Higher prices and a doubling in mortgage rates have made home buying less affordable for many people, but recent falls in interest rates may give some homebuyers new hope.
At its last meeting of 2022, the Federal Reserve raised interest rates by 0.50 percentage points, its seventh hike in the past year. That pushed the central bank’s policy rate down to a range of 4.25% to 4.5%, its highest level in 15 years.
Despite consumer-level inflation falling for six straight months, Fed officials have signaled they could raise the central bank’s interest rate by another three-quarters point in 2023, which would be in a range of 5% to 5.25%.
Interest rates on 30-year mortgages typically track movements in the 10-year Treasury yield, which lenders use as a guide to pricing loans.
Investor expectations of future inflation, global demand for US Treasuries, and Federal Reserve interest rates can also affect the cost of borrowing to own a home.
The interest rate on a 15-year mortgage, popular among those refinancing their homes, also fell to 5.28% this week from 5.52% last week. A year ago it was 2.79%.