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House prices are set to crash this year with San Jose, Austin, Phoenix and San Diego looking down the barrel of 25% declines from boom to bust, according to Goldman Sachs.
The Fed’s ongoing inflation battle, which sent mortgage rates rising from 3% to 7% in 2022, has choked the housing market and triggered the biggest price correction since the 2008 crash.
Goldman warned investors in a research paper earlier this month titled “Get Worse Before It Gets Better” that housing markets were particularly overheated in the Southwest and Pacific Coast.
While Goldman’s outlook for the domestic housing market is less dire, with prices expected to fall 6% this year before rising next, certain cities could see sharp declines in home valuations.
San Jose, Austin, Phoenix and San Diego are expected to see peak and trough declines of 25% that would rival the global financial crisis of 2007-2008, in which home prices plunged 27% overall the country.
Goldman Sachs issued its 2023 projections for home valuations, predicting that overheated markets on the West Coast and Southwest will see sharp corrections.
In 2023, Goldman forecasts double-digit home price declines in key markets like 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 is down 10.4% from the 2022 home price peak, meaning its boom-to-bust decline could be in excess of 25% as the trend continues this year.
Milder price corrections are anticipated in the Northeast, Southeast, and Midwest.
The bank projects house prices to fall slightly in Chicago (-1.8%) and New York (-0.3%) in 2023.
Small increases are expected in Baltimore (+0.5%) and Miami (+0.8%) during the same period.
Overall, Goldman forecasts that US house prices will fall 6.1% this year. This would represent an aggregate peak-to-trough decline of approximately 10% in US home prices through the end of this year beginning in June 2022.
Home prices in Austin (above) are projected to fall 15.6% this year, meaning their total decline from last year’s peak could be over 25%.
In a file photo, a “For Sale” sign is seen outside a home in Phoenix, Arizona. Goldman projects Phoenix home prices to fall another 12.9% this year
‘This [national] the decline should be small enough to avoid widespread mortgage credit stress, and a sharp increase in foreclosures across the country seems unlikely,’ the report says.
This means that the boom-bust bust is not expected to be half as bad as the 2008 bust, except perhaps in the Southwest and Pacific Coast.
The investment bank also offers a glimmer of hope, as it forecasts that the housing market will not experience a long-term recession as it did in 2008.
Goldman projects an overall increase in house prices of around 1% in 2024.
‘Assuming the economy stays on the path to a soft landing, avoiding a recession, and the 30-year fixed mortgage rate falls back to 6.15% by the end of 2024, house price growth will likely slow down. from depreciation to below-trend appreciation in 2024,’ the bank said.
Mortgage rates remain unpredictable: they peaked at 7.37% in November; the average 30-year fixed mortgage has fallen 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 plunging for 10 straight months to the lowest level in more than a decade.
A graph showing the change in US 30-year mortgage rates between September 2022 and January 2023
A for sale sign stands outside a home in Wyndmoor, Pennsylvania, on Wednesday, June 22, 2022.
Although home prices have receded as demand has eased, they are still nearly 11% higher than a year ago.
Higher prices and doubling of mortgage rates have made home buying much less affordable for many people, but recent rate declines could give some homebuyers new hope.
At its final meeting in 2022, the Federal Reserve raised its rate 0.50 percentage point, its seventh increase last year. That pushed the central bank’s key rate to a range of 4.25% to 4.5%, its highest level in 15 years.
Although consumer-level inflation has declined for six straight months, Fed officials have signaled that they can raise the central bank’s prime rate another three-quarters of a point in 2023, which would be in the range of 5% to 5.25%
Rates on 30-year mortgages typically follow movements in the 10-year Treasury yield, which lenders use as a guide in pricing loans.
Investor expectations about future inflation, global demand for US Treasuries, and what the Federal Reserve does with interest rates can also influence the cost of home loans.
The rate for a 15-year mortgage, popular with those refinancing their homes, also fell this week, to 5.28% from 5.52% last week. It was 2.79% a year ago.