The surge in mortgage rates and home prices earlier this year has hammered the housing market, pushing building, sales, and prices down.
While optimists in the industry are looking for a rebound, Goldman Sachs economists beg to differ.
“Early this year, we argued that extremely limited available supply in the housing market would dampen the hit to housing activity from higher interest rates,” they wrote in a commentary.
“Since then, housing starts have declined 20% from their peak, and existing home sales have fallen 30%.”
To be sure, “the usual statistical relationships would have implied even larger declines from a spike in mortgage rates of this magnitude absent the supply shortage in the sector.”
The 30-year fixed mortgage rate averaged 5.55% in the week ended Aug. 25, up from 2.87% a year earlier, according to Freddie Mac.
Economic Sluggishness
“The combination of higher mortgage rates and the slowdown in economic growth is weighing on the housing market,” said Sam Khater, Freddie Mac’s chief economist. GDP shrank an annualized 0.6% in the second quarter and 1.9% in the first quarter.
Getting back to Goldman’s views, “higher mortgage rates and reduced affordability are not the only drag on housing,” the economists 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.”
Existing home sales dropped 5.9% nationally in July from June, representing the sixth straight monthly decline, according to the National Association of Realtors (NAR). Sales were down 20.2% from a year earlier.
This “suggests that the recent declines have also reflected the partial retreat of a pandemic-related boost to housing demand,” the economists said.
“The sustained reduction in affordability, waning pandemic tailwind, and recent decline in purchasing intentions suggest that home sales are likely to fall further.”
The median existing-home price fell 3% in July to $403,800 from $416,000 in June, though it was up 10.8% from a year ago, according to NAR.
Home Sales Forecast
For the fourth quarter, Goldman economists anticipate a 12% descent in existing home sales from July.
Housing inventories have slowly started to normalize, and Goldman housing specialists expect 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 homeowner vacancy rate to remain below pre-pandemic levels at least through the end of next year,” the economists said.
“Our model suggests that home price growth will slow sharply in the next couple quarters … as the imbalance between supply and demand continues to shrink, mostly through lower demand.”
After that, “we expect home price growth to stall completely, averaging 0% in 2023,” the economists said.
If you’re a prospective homebuyer, this is good news. It may make sense for you to hold out for lower prices down the road.
