In the summer of 2020, something counterintuitive occurred in the housing market. Despite the unemployment rate remaining in double digits, the market underwent a significant shift, transitioning into a boom. This surge was a direct result of the remote work trend, which generated a heightened demand for housing space. Notably, between the summer of 2020 and 2022, household formation exceeded expectations by 2.2 million, as individuals sought to separate from crowded roommate situations, and financially stimulated millennials embarked on independent living arrangements. The surge in housing demand during the pandemic was so substantial that Federal Reserve researchers estimated that housing supply would have needed to increase by a staggering 300% in order to match that elevated housing demand.
Clearly, housing supply never matched the surge in demand, leading to an overheating of U.S. home prices. From March 2020 to June 2022, the Case-Shiller National Home Price Index recorded a staggering increase of 43.3% in U.S. home prices. According to researchers at the Federal Reserve Bank of San Francisco, more than 60% of these gains can be directly attributed to the heightened demand triggered by work-from-home policies.
Fast forward to 2023, and the mortgage rate shock has clearly stopped the overheating—national house prices in April as tracked by Case-Shiller remain 2.4% below the June 2022 peak—however, we haven't seen a huge give-up. The vast majority of pandemic house price gains remain, and that's true even in Western markets that were hit hard by last year's housing correction.
Does the recent house price stabilization indicate that the window to relinquish some of the gains from the Pandemic Housing Boom has closed? Moreover, does this stabilization suggest that national home prices have already returned to normal levels of growth?
To get an indication of where things might head next, Fortune looked over Goldman Sachs' latest economic forecast released on Monday.
Looking ahead, Goldman Sachs' forecast model predicts a very faint increase in U.S. home prices as measured by Case-Shiller: +1.3% in 2023, followed by +1.7% in 2024, +2.4% in 2025, and +3.8% in 2025. To put this into perspective, the average annual growth rate of U.S. home prices since 1976 has been 5.5%, including an unprecedented surge of 19% in 2021.
While Goldman Sachs' forecast is technically predicting a slow grind upwards, one could argue it's also a "sideways" housing market—at least "sideways" relative to the growth rates we've seen over the past decade.
After all, if this prediction comes to fruition, U.S. home prices would end 2026 just 4.5% above the pandemic peak achieved in June 2022, and up just 10.1% from the bottom in January 2023.
While tight resale inventory continues to exert upward pressure on home prices, Goldman Sachs indicates that strained affordability resulting from the pandemic house price boom and the spike in mortgage rates from 3% to over 6% is placing downward pressure on prices. However, when these opposing forces are considered collectively, the forecast from Goldman Sachs projects that the housing market will experience a gridlock, with only very low levels of house price growth through 2026. Furthermore, the forecast anticipates minimal relief for mortgage rates, projecting that the 10-year Treasury yield will average 3.75% between 2024 and 2026. If this scenario unfolds, mortgage rates are likely to remain around 6%.
It is important to note that U.S. home prices have already increased by 2.3% this year as of April. Therefore, for Goldman Sachs' prediction of a 1.3% national house price gain in 2023 to come to fruition, prices would need to experience a slight decline between now and the end of the year.
It sounds like Goldman Sachs does indeed expect some softening this fall.
"With mortgage rates now ~75bp higher [than in the spring], we expect some affordability-related pressures will drive weaker home price growth in coming months," wrote Goldman Sachs researchers in their latest housing note.
Heading forward, Goldman Sachs' forecast model also predicts that inflation won't break out again, with the Consumer Price Index rising 3.0% in 2023, +2.8% in 2024, +2.4% in 2025, and +2.4% in 2026. While Goldman Sachs expects the job market will remain tight, with the unemployment rate staying below 4% through 2026.
In simple terms, Goldman Sachs anticipates an economic soft landing accompanied by a housing market that is strained by affordability and supply issues, resulting in a period of relatively stagnant national house prices.
