Goldman Sachs expects home values to deteriorate through 2023 amid continued sky-high interest rates and falling home prices.
The firm wrote to clients earlier this month that it predicts four US cities will suffer the most catastrophic declines, drawing comparisons to the 2008 housing crash.
San Jose, California; San Diego, California; Austin, Texas; and Phoenix, Arizona, are likely to see noticeable increases before drastic declines of more than 25%.
Those declines would be similar to those seen during the Great Recession of 2008. Home prices across the U.S. fell about 27% at that time, according to the S&P CoreLogic Case-Shiller index.
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“Our revised forecast for 2023 primarily reflects our view that interest rates will remain at elevated levels longer than currently priced, with 10-year Treasury yields peaking in Q3 2023,” Goldman Sachs strategists wrote, according to the New York Post. “As a result, we are raising our forecast for the 30-year fixed mortgage rate to 6.5% by the end of 2023 (representing a 30bp increase from our previous expectation).”
In 2022, mortgage interest rates rose from 3% to 6%.
“This (national) decline should be small enough to avoid broad mortgage stress, with a sharp increase in foreclosures nationwide seemingly unlikely,” Goldman Sachs wrote. “That said, overheated housing markets in the Southwest and Pacific Coast, such as the San Jose MSA, Austin MSA, Phoenix MSA, and San Diego MSA, will likely struggle with top-to-bottom declines in excess of 25%, posing a localized risk of higher mortgage arrears incurred in 2022 or the end of 2021.”
The bank says these cities will suffer from the lowest prices this year because they became too detached from fundamentals during the housing boom of the COVID-19 pandemic.
Goldman Sachs also predicts that many markets in the Northeast, Southeast and Midwest could see milder corrections.
Home prices are expected to fall slightly in New York City (-0.3%) and Chicago (-1.8%), while Baltimore (+0.5%) and Miami (+0.8%) will see higher prices, said the company.
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“Assuming the economy remains on track for a soft landing, avoids a recession, and the 30-year fixed mortgage rate falls back to 6.15% by the end of 2024, home price growth is likely to shift from depreciating to below-trend appreciation in 2024,” Goldman Sachs wrote.
The average 30-year fixed mortgage rate peaked at 7.37% in November.