Soaring mortgage rates and house prices earlier this year hammered the housing market, pushing construction, sales and prices down.
While industry optimists look for a rebound, Goldman Sachs economists disagree.
“Early this year, we argued that the extremely limited available supply in the housing market would soften the blow to real estate activity from higher interest rates,” they wrote in a commentary.
“Since then, housing starts are down 20% from their peak and existing home sales are down 30%.”
Certainly, “usual statistical relationships would have implied even larger declines from a mortgage rate spike of this magnitude had there been no shortage of supply in the sector.”
The 30-year fixed mortgage rate averaged 5.55% in the week ended Aug. 25, down from 2.87% a year earlier, based on Freddie Mac.
Economic sluggishness
“The combination of higher mortgage rates and slowing economic growth is weighing on the housing market,” said Sam Khater, chief economist at Freddie Mac. GDP fell by an annualized 0.6% in the second quarter and by 1.9% in the first quarter.
Returning to Goldman’s views, “higher mortgage rates and reduced affordability aren’t the only drag on housing,” the economists said.
“Existing home sales and building permits have fallen most sharply this year in areas where they rose the most at the start of the pandemic.”
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Existing home sales fell 5.9% nationally in July from June, the sixth consecutive monthly decline, according to the National Association of Realtors (NAR). Sales decreased by 20.2% compared to the previous year.
This “suggests that the recent declines have also reflected the partial pullback from a pandemic-related stimulus to housing demand,” the economists said.
“The sustained reduction in affordability, the weakening of the pandemic and the recent decline in purchase intentions suggest that home sales should decline further.”
The median price of existing homes fell 3% in July to $403,800 from $416,000 in June, although it was up 10.8% from a year ago, according to NAR.
Home Sales Forecasts
For the fourth quarter, Goldman economists forecast a 12% decline in existing home sales from July.
Housing inventories have slowly started to normalize and housing specialists at Goldman expect the stats to rebound 10% next year from July’s pace.
“However, supply constraints have limited the pace of completions and as a result we expect the owner vacancy rate to remain below pre-pandemic levels at least until the end of next year. “, said the economists.
“Our model suggests that house price growth will slow sharply over the next two quarters…as the imbalance between supply and demand continues to narrow, driven primarily by weaker demand.”
After that, “we expect house price growth to come to a complete halt, averaging 0% in 2023,” the economists said.
If you’re a potential buyer, that’s good news. It may be wise for you to expect lower prices down the road.