US housing market decline to worsen in 2023: Goldman Sachs

The US housing market has been slowing down in the past few months as interest rates continue to climb.

But Goldman Sachs has warned prospective home sellers that the housing market downturn is expected to worsen in 2023. And for interested home buyers, this doesn’t necessarily mean lower home prices.

“We expect home price growth to stall completely, averaging 0% in 2023,” Goldman strategist and economist Jan Hatzius wrote in a memo to clients. “While outright declines in national home prices are possible and appear quite likely for some regions, large declines seem unlikely.”

In the second quarter, home prices averaged $525,000. To compare, last year’s second quarter averaged $473,000, and in 2020, the average was just at $374,500.

Despite strategists predicting a small decline in home prices over the next year, prices are expected to remain high due to inflation and a limited inventory of homes.

“Higher mortgage rates and reduced affordability are not the only drag on housing,” the memo adds. “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.”

Average US home prices from 2019 to 2022.
Average US home prices from 2019 to 2022.
St. Louis Fed’s Economic Research Divisions

The average rate for a 30-year fixed mortgage climbed to 5.66% for the first time for the week ending Sept. 1, according to data from mortgage lender Freddie Mac — a significant jump from one year ago when rates were at 2.88%.

In summary, considering all the factors, Goldman predicts a 22% decline in new home sales before the year is over, a 17% drop in existing home sales and 8.9% in the overall housing GDP.

Goldman projects these numbers to decline even further in 2023, with a 9.2% decrease in housing GDP next year.

Despite predicted declines in home sales, the Federal Reserve is doubling down on their intention to continue hiking interest rates as inflation remains

“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,” Fed Chairman Jerome Powell said in a speech last month. “These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”

Sentiment from home builders and developers has plunged to its lowest level in two years, according to the Census Bureau. Builders are hitting the brakes on construction as building costs continue to rise. Meanwhile, Americans are canceling deals to buy homes at the highest rate since the start of the COVID pandemic.

Nearly one in five home sellers slashed the asking price for their homes in August in an attempt to lure in buyers.

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