U.S. housing market has most likely entered its first recession in more than ten years, and investors should be prepared for it to worsen, Goldman Sachs, an economist warns.
Goldman strategists predicted in a note to clients that activity in the housing sector will decline significantly over the next few months, with price growth eventually falling to zero in the third quarter of 2019.
“We expect home price growth to stall completely, averaging 0% in 2023,” the Goldman analyst, led by Jan Hatzius, said. “While outright declines in national home prices are possible and appear quite likely for some regions, large declines seem unlikely.”
The analyst note was released at a time when agonizingly high inflation and rising borrowing costs had forced prospective homebuyers to cut back on their spending.
Yet despite a decline in home sales, prices are still high due to the still-scarce supply. Sales have dropped to their lowest level in years as a result of rising mortgage rates, potential buyers backing out of deals in greater numbers, and sales dropping to the lowest level in two years — builders have become increasingly reluctant to build new homes, keeping prices high.
A sustained reduction in affordability and a decline in purchasing intentions, however, could lead to further weakening in home sales, thus reducing prices across the board, Hatzius wrote in the note.
“Higher mortgage rates and reduced affordability are not the only drag on housing,” the note said. “Existing home sales and building permits have fallen more sharply this year in regions where they increased the most in the earlier part of the pandemic, suggesting that the recent declines have also reflected the partial retreat of a pandemic-related boost to housing demand.”
In all, Goldman projects sharp declines this year in new home sales (22% decline), existing home sales (17% drop) and housing GDP (8.9% drop). It projects further declines in 2023, including another 9.2% decline in housing GDP next year.
A slew of new economic data published earlier this month shows the sector is starting to slow considerably: Home builders’ sentiment about the industry plunged to the lowest level in two years, buyers are retreating from the market as they cancel home sales at the fastest pace since 2020 and builders are rethinking construction.
“We’re witnessing a housing recession in terms of declining home sales and home building,” Lawrence Yun, chief economist for 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 its support for the economy. Policymakers already approved a 75-basis point rate increase in both June and July and have signaled that another mega-sized increase 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 as the Fed began hiking rates, but have cooled in recent weeks amid growing fears about the state of the U.S. economy and the threat of a looming recession.
However, rates rose again last week after Fed Chairman Jerome Powell delivered a speech in which he promised to fight inflation “forcefully,” regardless of the potential economic fallout.
“While higher interest rates, slower growth and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” Powell said. “These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”
The average rate for a 30-year fixed mortgage climbed to 5.66% for the week ending Sept. 1, according to recent data from mortgage lender Freddie Mac. That is significantly higher than just one year ago when rates stood at 2.88%.
