Attention homeowners and real estate investors, Goldman Sachs has bad news: home prices are going to fall further in 2023 than they had previously thought. In a note to clients earlier in January, strategists at the bank said that their outlook on the housing market had angered and that they believed the S&P CoreLogic Case-Shiller US National Home Price NSA Index will decline by 6.1% year-over-year by Q4 2023. Their previous estimation was -4.1% over the same period.
Four cities expected to see peak-to-trough declines of over 25%
They forecast that San Jose, Austin, Phoenix, and San Diego will likely see peak-to-trough declines of more than 25%. Such declines would rival those seen around the country around a decade-and-a-half ago. During the mid-2000s housing crisis, home prices across the US fell around 27%, according to the S&P CoreLogic Case-Shiller index. Home prices most recently peaked in June 2022, which means the total decline on a natinoal basis will end up being about 10%, said Lotfi Karoui, Vinay Viswanathan, and Ronnie Walker. Prices would start to post positive growth again in 2024, they said.
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Higher mortgage rates to blame
They are now more bearish because they anticipate that mortgage rates will stay higher for longer than investors expect. “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 said.
Housing affordability continues to decline
Housing affordability has significantly declined since the start of the pandemic, as skyrocketing home prices and mortgage rates have driven up monthly housing payments relative to salaries.
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What other firms are saying
Goldman Sachs isn’t the only Wall Street bank calling for further home price declines in 2023. Morgan Stanley strategist James Egan said in a January note that he sees home prices falling by 4% in 2023 thanks to stagnant demand. Meanwhile, Wells Fargo economists Charlie Dougherty and Patrick Barley see declines of around 5.5%. Some are calling for even greater declines. Interactive Brokers Senior Economist Jose Torres has called for 25% decline, and KPMG Chief Economist Diane Swonk sees as much as a 20% drop coming.
Tech sector job cuts to exacerbate declines
Swonk tied her call to the slowdown in job growth in the tech sector. Firms like Google, Facebook, and Microsoft have cut thousands of jobs in recent weeks. “Hiring freezes in the tech sector are exacerbating declines; many cheaper markets saw astonishing appreciation due to the higher salaries tech workers brought with them,” she said.
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Cities with highest price jumps to see the worst declines
On a regional and city level, the consensus seems to be that declines will be worst in cities that saw the biggest price jumps over the last few years. According to Zillow data, prices in Austin are already down more than 10% from their peak, while San Jose, San Diego, and Phoenix are all down more than 6.5%.
Soft demand makes markets more favorable for buyers
One consequence of softer demand is that some markets are becoming more favorable to buyers. According to Redfin, Phoenix and San Diego are the two markets in the US with the highest percentage of buyers getting multiple offers on their homes. This indicates a shift in the market as buyers have more leverage to negotiate prices and terms. It’s important to note that these predictions are based on current market trends and events, and are subject to change. Homeowners and investors should closely monitor the housing market and seek professional advice before making any major decisions.
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