Revised Housing Forecast Indicates Analysts Predict No Decline in Home Prices This Year
Goldman Sachs analysts no longer anticipate a decline in home prices for the year. Instead, they have adjusted their forecasts, predicting a slight increase.
In a note for the housing team, Vinay Viswanathan, a fixed income strategist at Goldman Sachs, stated, “We are revising our home price forecasts higher, projecting a 1.8% increase for full-year 2023 compared to the previous forecast of -2.2%, and a 3.5% increase in 2024 compared to the prior forecast of 2.8%.” He further added that these forecasts imply that home prices will remain relatively stable until the year-end, and then return to their usual growth levels in 2024.
This shift in analysis follows a revival in home prices and persistently high mortgage rates, which have created a challenging homeownership situation for numerous Americans. Previously, Goldman Sachs analysts believed that the increase in mortgage rates would exert downward pressure on home prices.
However, according to the latest data from Case-Shiller’s national price index, home prices, after seven consecutive months of descent, changed direction in February and have maintained their upward trajectory through May. Craig J. Lazzara, managing director at S&P DJI, confirms that January marked the final month of monthly declines, as supported by the data.
Viswanathan highlighted two primary factors contributing to the stability of home prices. Firstly, housing supply remains scarce, with the share of available existing homes for sale currently standing at approximately 1 million compared to around 2 million before the pandemic. This data is based on the National Association of Realtors data and Goldman Sachs’ research.
Secondly, although the supply of new homes has been increasing as builders intensify their construction efforts, most of these newly constructed properties are still under development. On the other hand, the number of completed new homes remains lower than pre-COVID levels.
Census Bureau data released on Wednesday indicates that housing starts for new single-family units witnessed a 6.7% jump in July compared to the previous month, while completions saw a more modest 1.3% increase.
In addition to limited supply, housing demand has surpassed expectations. Despite the housing affordability index hitting record lows, Goldman Sachs analysts anticipated nationwide declines in home prices before potential buyers would respond. However, that prediction has since changed.
Viswanathan explained, “We attribute much of this demand to non-economic factors such as household formation and seasonal turnover.” He also noted that although high-frequency data suggests housing turnover may stabilize, household formation remains above its long-term trend.
Housing affordability has declined in the past year due to high mortgage rates. According to Freddie Mac, the average rate on the 30-year fixed mortgage has risen above 7% in the last week. While many homebuyers have managed to absorb these increased costs, Goldman Sachs has raised concerns about their ability to sustain such adjustments. In particular, the average debt-to-income ratio on conforming purchase mortgages is over 38%, which is significantly higher than the average post-Global Financial Crisis. There has also been a stronger price growth in smaller and lower-priced homes compared to larger, higher-quality properties. However, there is some optimism as Viswanathan predicts a potential 100 basis point decrease in mortgage rates by the end of next year, which could help stabilize affordability.
