US housing market downturn to worsen in 2023, Goldman Sachs warns

The US housing market is likely to have slipped into its first recession in more than a decade, and Goldman Sachs economists have warned that investors should brace for the recession to worsen.

In a note to clients, goldman strategists He forecast that activity in the housing sector will slow considerably in the coming months, with price growth eventually falling to zero in the third quarter of next year.

“We expect house price growth to come to a complete halt, averaging 0% in 2023,” said the Goldman analyst, led by Jan Hatzius. “While absolute declines in national house prices are possible and appear quite likely in some regions, large declines seem unlikely.”

The analyst note comes as painfully high inflation and rising borrowing costs have forced would-be homebuyers to cut spending.

HOW HOUSING IS FUELING HOT INFLATION

A For Sale sign is posted in front of a property in Monterey Park, California, on August 16, 2022. (Photo by FREDERIC J. BROWN/AFP via Getty Images/Getty Images)

But even when home sales decline, prices remain high because supply remains so tight. With mortgage rates on the rise and a growing number of potential buyers pulling out of deals, and sales fall to the lowest level in two years: Builders have become increasingly reluctant to build new homes, keeping prices high.

However, a sustained decline in affordability and a decline in purchase intentions could lead to a further weakening in home sales, lowering prices across the board, Hatzius wrote in the note.

“Higher mortgage rates and reduced affordability are not the only barrier to housing,” the note said. “Existing home sales and building permits have fallen most sharply this year in regions where they rose the most in the early part of the pandemic, suggesting that recent declines have also reflected the partial reversal of a pandemic-related boost.” pandemic in housing demand”.

In total, Goldman projects sharp declines this year in new home sales (22% decline), existing home sales (17% decline) and housing GDP (8.9% decline). It projects further declines in 2023, including another 9.2% drop in housing GDP next year.

A slew of new economic data released earlier this month shows the sector is starting to slow down considerably: Homebuilders’ sentiment about the industry has plummeted to the lowest level in two years, buyers are pulling out of the market as they cancel home sales at the fastest pace. since 2020 and builders are rethinking construction.

HOMEBUILDERS SEE ‘HOUSING RECESSION’ AS SENTIMENT SINKS TO A NEW 2-YEAR LOW

united states real estate market

A view of houses in a neighborhood in Los Angeles, California, on July 5, 2022. (Photo by FREDERIC J. BROWN/AFP via Getty Images) / Getty Images)

“We are witnessing a housing recession in terms of declining home sales and home construction,” Lawrence Yun, chief economist at the National Association of Realtors, said recently.

The interest-rate sensitive housing market has started to cool noticeably in recent months as the Federal Reserve moves to tighten policy at the fastest pace in three decades and withdraws support for the economy. Policymakers have already approved a 75 basis point rate hike in both June and July and have signaled that another mega-hike is on the table when they meet in September.

This comes as consumers face higher mortgage rates, which rose sharply during the first half of the year when the Fed began raising rates, but have cooled in recent weeks amid growing fears about the state of the economy. united states economy and the threat of an impending recession.

However, rates rose again last week after Fed Chairman Jerome Powell delivered a speech in which he promised to fight inflation “vigorously” regardless of the potential economic fallout.

Jerome Powell, Chairman of the Federal Reserve

US Federal Reserve Chairman Jerome Powell, from right, Lael Brainard, Vice Chairman of the Board of Governors of the Federal Reserve System, and John Williams, President and CEO of the Federal Reserve Bank of New york, durin (Photographer: David Paul Morris/Bloomberg via Getty Images/Getty Images)

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“While higher interest rates, slower growth and softer labor market conditions will reduce inflation, they will also bring some pain to households and businesses,” Powell said. “These are the unfortunate costs of reducing inflation. But failing to restore price stability would mean much greater pain.”

The average rate for a 30-year fixed rate mortgage it rose to 5.66% for the week ending Sept. 1, according to recent data from mortgage lender Freddie Mac. That’s significantly higher than just a year ago when rates stood at 2.88%.

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