House prices will plummet this year with San Jose, Austin, Phoenix, and San Diego staring down the barrel of 25% boom-to-bust declines, according to Goldman Sachs.
Goldman warned investors in a research paper earlier this month titled, ‘Getting worse before getting better’, that housing markets were particularly overheated in the Southwest and Pacific Coast.
While Goldman’s outlook for the national housing market is less dire, with prices seen dropping 6% this year before rising next year, certain cities could see sharp declines in home valuations.
San Jose, Austin, Phoenix, and San Diego are projected to be stung with peak-to-trough declines of 25% that would rival the 2007-08 Global Financial Crisis which saw house prices plunge 27% nationwide.
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 is forecasting 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 dropped 10.4% from its 2022 peak house price, meaning its boom-to-bust decline could be north of 25% as the trend continues into this year.
Milder price corrections are anticipated in the Northeast, Southeast, and Midwest.
The bank projects house prices to dip 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 US house prices to fall by 6.1% this year. This would represent an aggregate peak-to-trough decline of roughly 10% in US home prices through the end of this year from June 2022.
Home prices in Austin (above) are projected to drop 15.6% this year, meaning its total decline from last year’s peak could be north of 25%
A ‘For Sale’ sign outside a home in Phoenix, Arizona is seen in a file photo. Goldman projects Phoenix home prices will fall another 12.9% this year
‘This [national] decline should be small enough as to avoid broad mortgage credit stress, with a sharp increase in foreclosures nationwide seeming unlikely,’ the report says.
This means that the boom-to-bust crash is not expected to be even half as bad as the 2008 meltdown, except perhaps in the Southwest and Pacific Coast.
The investment bank also offers a glimmer of hope as it foresees that the housing market will not experience a long-term downturn as it did in 2008.
Goldman is projecting an overall rise in house prices of around 1% in 2024.
‘Assuming the economy remains on the path to a soft landing, avoiding a recession, and the 30-year fixed mortgage rate falls back to 6.15% by year-end 2024, home price growth will likely shift from depreciation to below-trend appreciation in 2024,’ the bank said.
Mortgage rates remain unpredictable – peaking at 7.37% in November – the average 30-year fixed mortgage has fallen to 6.09% after better-than-expected inflation numbers.
The big rise in mortgage rates during the past year has strangled the housing market, with sales of existing homes falling for 10 straight months to the lowest level in more than a decade.
A graphic showing the change in 30-year mortgage rates across the USA between September 2022 and January 2023
A sale sign stands outside a home in Wyndmoor, Pennsylvania, Wednesday, June 22, 2022
Though home prices have retreated as demand has declined, they are still nearly 11% higher than a year ago.
Higher prices and a doubling of mortgage rates have made homebuying much less affordable for many people, but recent rate declines could give some homebuyers new hope.
At its final meeting of 2022, the Federal Reserve raised its rate 0.50 percentage points, 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.
Though inflation at the consumer level has declined for six straight months, Fed officials have signaled that they may raise the central bank’s main borrowing rate another three-quarters of a point in 2023, which would be in a range of 5% to 5.25%.
Rates for 30-year mortgages usually track the moves in the 10-year Treasury yield, which lenders use as a guide to pricing loans.
Investors’ expectations for future inflation, global demand for U.S. Treasuries and what the Federal Reserve does with interest rates can also influence the cost of borrowing for a home.
The rate for a 15-year mortgage, popular with those refinancing their homes, also declined this week, to 5.28% from 5.52% last week. It was 2.79% one year ago.