In one hand, the 2.4% decline in US home prices seen between June and October little relative to the housing crash of 26% of the national decline in home prices from a high in 2007 to a low in 2012. On the other hand, the ongoing house price correction there may be a lot of gas left in the tank.
Look no further than a Goldman Sachs paper released last week with the title “Getting worse before it gets better.” The investment bank researchers argued in the paper that the national house price adjustment will continue until 2023.
“We have lowered our 2023 forecast for the year-over-year depreciation of the Case-Shiller Home Price Index to -6.1% from -4.1% previously. This would represent an aggregate peak-to-trough decline by almost 10% of US home prices until the end of this year from June 2022,” wrote Goldman Sachs researchers.
Until October, the lagged Case-Shiller National Home Price Index registered a -2.4% national decrease in house prices. However, the researchers of the investment bank estimate that once we get the readings for November and December, we will see that national house prices have already decreased by -4%. That means we’re about halfway through Goldman Sachs’ estimated 10% peak-to-trough decline.
Nationally, a 10% peak-to-trough drop in US home prices — which rose 41% between March 2020 and June 2022 — shouldn’t do much financial damage, Goldman Sachs said. However, the company says some regional markets are not so lucky.
“This [national] The reduction should be small enough to avoid widespread mortgage lending stress, with a sharp increase in foreclosures across the country looking 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 are likely to struggle with peak-to-trough declines of over 25 %, presenting a local risk of higher delinquencies. for loans originating in 2022 or late 2021,” wrote Goldman Sachs.
By 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 the areas where the home price correction will hit the hardest in the second half of 2022. In fact, through November, Austin is down 10.4% from its 2022 peak home prices.
Why Goldman Sachs expects the correction to deliver the biggest blow to markets like San Diego and Austin? The investment bank says the markets are “overheated,” which means home price growth is there very detached from the basics during the the Pandemic Housing Boom. Being separated from the basics packs a harder punch when mortgage payments spike as they did in 2022.
Going forward, Goldman Sachs thinks many Northeastern, Southeastern, and Midwestern markets will see milder corrections (if any correction at all). In 2023, the investment bank expects house prices to barely fall in places like Chicago (-1.8%) and New York (-0.3%), while its forecast has an increase in house prices in Baltimore (+ 0.5%) and Miami (+ 0.8%) in 2023.
“Our revised forecast to 2023 primarily reflects our view that interest rates will remain at elevated levels higher than currently priced in, with the 10-year Treasury yield of increased in 2023 Q3. rate to 6.5% for the end of the year 2023 (representing an increase of 30 bp from our previous expectation),” wrote researchers at Goldman Sachs. “This path will cause affordability to worsen, after a slight improvement in the last two months.”
While the investment bank expects US home prices to fall by 6.1% in 2023, it does not expect a long-term decline like the previous bust: In 2024, Goldman Sachs expects prices to at home in the US will rise 1% even as markets such as Austin and Phoenix continue. fall
“Assuming the economy remains on track for a soft landing, avoiding a recession, and the 30-year fixed mortgage rate falls back to 6.15% by the end of 2024, the house price growth will likely shift from depreciation to below-trend appreciation in 2024,” wrote Goldman Sachs.
If this is the Goldman Sachs forecast or Moody’s view, the biggest wildcard for any home price forecast model remains mortgage rates. (You can find the latest home price forecasts from 27 of the nation’s leading real estate research firms HERE.)
At the peak of November, the average 30-year fixed mortgage rate as measured by Mortgage Rate Daily sat at 7.37%. However, after the positive news about inflation in the last few months, financial conditions weakened and the average 30-year fixed mortgage rate fell to 6.09%. If mortgage rates continue to fall, firms like Goldman Sachs should start upgrading their home price outlooks.
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