Home prices to fall more than 25% from peak levels in ‘overheated’ markets, says Goldman

Credit researchers at Goldman Sachs now expect home prices in several “overheated” urban areas to fall more than 25% from peak levels.

The urban areas included in their forecast were San Jose, Austin, Phoenix and San Diego, according to a new housing price forecast from the Goldman research team led by Lotfi Karui.

According to Goldman, in some markets at risk of the biggest price decline this year (see chart), house price growth has already declined by at least 10%.

Austin, San Francisco, San Diego and Phoenix will experience the biggest declines in home prices in 2023.

Zillow, Goldman Sachs Global Investment Research

While the sharp drop in prices could pose a “local risk of higher delinquencies on mortgages issued in 2022 or late 2021,” the decline is not expected to be such a big threat across the board.

Nationally, the Goldman team expects home prices to fall about 10% this year from June 2022 levels, after projecting a decline of about 4% in the second half of last year.

“This decline should be small enough to avoid widespread mortgage-related stress, with a sharp increase in foreclosures across the country appearing unlikely,” the team wrote.

US real estate activity fell sharply after the Federal Reserve began raising rates in March to tame high inflation. However, according to Deutsche Bank, house prices have also risen by 40% since March 2020.

Goldman’s new home price outlook was based on the expectation that interest rates will stay high for longer. The team said their year-end forecast for the 30-year fixed-rate mortgage has been revised up 30 basis points to 6.5%, but they expect it to fall to 6.15% in 2024.

“This path will lead to a gradual deterioration in affordability after a small improvement over the past two months,” the team said, with home prices likely to rise to 1% in 2024 if the US economy avoids a recession.

US stocks rose for a second straight session on Wednesday, a day before a consumer inflation update is expected to show a monthly decline to 6.5% year-on-year from a peak of 9.1% this summer. Dow Jones industrial index DJIA,
+0.80%
added 0.8% on Wednesday, the S&P 500 SPX index,
+1.28%
rose by 1.3%, while the Nasdaq Composite COMP index,
+1.76%
rose by 1.8%.

To read: Why Thursday’s US CPI report could kill stock market hopes for lower inflation

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