Goldman Sachs Revises Housing Market Forecasts

In a surprising turn of events, Goldman Sachs housing analysts have reversed their earlier predictions and now anticipate a modest increase in home values this year. This shift in outlook, from a projected -2.2% to a positive 1.8% for full-year 2023, reflects changing dynamics in the housing market.

Goldman Sachs fixed income analyst Vinay Viswanathan, noted this change, stating that their revised forecasts also include a rise of 3.5% in home prices for 2024, up from the previous estimate of 2.8%. While these numbers suggest a near-stagnation in home prices for the remainder of the year, the outlook is more optimistic for 2024.

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This optimism comes as a surprise, given the persistent rise in housing prices and elevated mortgage rates that have made homeownership a daunting prospect for many Americans. Initially, higher mortgage rates were expected to put downward pressure on home values, according to Goldman Sachs analysts.

The housing market exhibited a reversal of trends in February, with home prices showing stability through May, as indicated by the latest Case-Shiller data. S&P DJI's managing director, Craig Lazzara, even suggested that January could have marked the end of monthly price declines.

Viswanathan also pointed out two key factors influencing property prices. First, the housing supply remains tight. Data from the National Association of Realtors, provided by Goldman Sachs, reveals a significant drop in existing properties for sale, from 2 million before the pandemic to just 1 million. Moreover, much of the new inventory is still under construction, despite efforts by builders to expand housing construction.

Second, housing demand continues to outpace expectations. Goldman Sachs analysts initially predicted a nationwide decline in home prices due to the housing affordability index hitting record lows. However, this prediction shifted as demand persisted, driven by factors like household formation and seasonal turnover. High-frequency data indicates that while housing turnover may slow, household formation remains above its long-term trend.

Housing affordability has indeed been compromised over the past year, primarily due to soaring mortgage rates, with the average 30-year fixed mortgage rate surpassing 7%. However, Goldman Sachs suggests that the behavior of homebuyers adapting to these elevated rates reflects a degree of acceptance of higher prices.

Notably, smaller and more affordable dwellings have seen greater demand compared to larger, more expensive ones. Nevertheless, the outlook for affordability could improve as Goldman Sachs estimates a potential 100 basis point drop in mortgage rates by next year, stabilizing the housing market's overall affordability.