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These four cities will see 2008-like correction in home prices: Goldman Sachs

These “overheated" housing markets will see a decline of more than 25%, the company predicts

Goldman Sachs’ latest home price predictions could be cause for concern. The multinational investment bank and financial services company says home prices, which have been on the decline since June 2022, will fall further this year than previously predicted.

The company notified its clients earlier this month that based on the S&P CoreLogic Case-Shiller US National Home Price NSA Index’s projected decline, the housing market has fallen out of favor with Goldman Sachs. The index projected a decline of 6.1% year over year by the fourth quarter of 2023, an increase from its previous prediction of 4.1%.

The company is eyeing the San Jose, Austin, Phoenix, and San Diego markets in particular. These “overheated” housing markets will see “peak-to-trough declines” of more than 25%, according to Goldman Sachs. This, in turn, will lead to risks of higher delinquencies for mortgages originated last year or late 2021, according to the company.

The expected declines in these markets are not far from what occurred during the 2008 housing crash, when home prices in the U.S. fell by approximately 27%, according to the index.

The national decline, on the other hand, is expected to balance out the decline in these four markets — and is predicted to be enough to avoid mortgage credit stress and a sudden hike in foreclosures across the U.S.

According to Redfin, San Diego and Phoenix are among the most popular markets for seller concessions. These concessions include offering buyers money for home repairs and mortgage-rate buydowns as homeowners continue to sell homes for below the asking price.

Lotfi Karoui, Goldman Sachs’ chief credit strategist, fixed income strategist Vinay Viswanathan and economist Ronnie Walker told Business Insider that since home prices peaked in June 2022, “the total decline on a national basis will end up being about 10%” and that prices will grow again in 2024.

Mortgage rates will also stay higher for longer than investors expected.

“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,” company strategists wrote to clients. “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).”

This will worsen housing affordability, which has been dipping since the onset of the COVID-19 pandemic.

Among other predictions mentioned in the company’s note is an expectation of “milder corrections” in Northeastern, Southeastern and Midwestern markets to better meet supply and demand.

However, not all hope is lost.

“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,” it added.

Although Goldman Sachs’ predictions are likely to concern real estate investors, a New Western report states that investors are confident going into 2023, despite the current housing market trends.

Comments

  1. You guys put out a completely misleading Headline. The price levels are not going to be the same as 2008. They are predicting a percentage decline that rivals the percentage decline in 2008. Our median value in AZ is approx. $442 and in 2008, it was $262k. Anyone who thinks that prices are going to 2008 levels is not thinking clearly. Not to mention we had a cumulative increase of 35% or more over the last 2 years. Goldman is completely off base on interest rates and at least the Phoenix market. They missed quite a few factors. Will check back with you in June.

    1. Thanks for highlighting our misleading headline. We have updated the headline to reflect percentage decline instead of a nominal price decline.

      Diego Sanchez, COO
      HW Media

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