One thing that’s been consistent about home prices since the start of the pandemic: They’ve been rising across the country. This persists even as mortgage rates more than double from 3% to just over 8% by 2023 and buying activity plummets. in July, wealthThe then housing editor (and current residential club co-founder) Lance Lambert Goldman Sachs sums up its view on the market: Will we be stuck in another four years of deadlock? This is even before a “longer-term higher” interest rate scenario starts to sink in.
A quarter later, Goldman Sachs again issued its latest forecast, and although it said “the sharpest declines in housing activity and prices are now well behind us,” buyers saw no signs of relief. But will interest rates be higher if they are longer, house prices are higher and economic activity is sluggish? Check, check, check.
For example, Goldman Sachs expects “continued higher mortgage rates” to have the most significant impact on housing volume next year, according to its latest 2024 housing outlook released on Sunday. Mortgage rates for nearly all borrowers are below current market rates, meaning they have little reason to move, further exacerbating supply constraints in an already underbuilt housing market. In other words, we’ve been seeing the lock-in effect of 7% rates almost all year, and now it’s time to see the lock-in effect of 8% mortgage rates.
Regarding the prospect of mortgage rates remaining at a more than two-decade high of 8%, strategists including chief economist Jan Hatzius “expect mortgage rates to remain high for the foreseeable future and will remain high by the end of next year.” Down to just under 7%.”
Taking into account supply, demand, affordability and home prices, Goldman Sachs’ housing model suggests that home prices, as measured by the Case-Shiller Home Price Index, will fall 0.8% by December this year. However, with house prices rising by 4.2% this year, this would bring our year-on-year growth to 3.4%, according to the bank’s estimates. While Goldman Sachs predicts home prices will rise again in 2024, the increase will be a much smaller 1.3% “as supply remains tight but high interest rates impact affordability.” That’s the first downward revision since July, when Goldman Sachs expects home prices to rise 1.7% in 2024.
All of this adds up to a lack of home buying activity.
Lowest sales figures in 3 years
Which brings us to another prediction: Higher long-term mortgage rates, and the resulting lock-in effect, will push existing home sales to their lowest levels since the early 1990s. According to the National Association of Realtors, sales of existing homes fell 15% annually in September, the lowest level since 2010.
In addition, Goldman Sachs also talked about the limited supply in the housing market, which allows homebuilders to withstand higher interest rates. In September, housing starts were 5% above pre-pandemic levels. This won’t last long. The bank expects new housing starts to fall 4% in 2024 to less than 350,000 units due to lower multifamily starts, which would be the lowest level of multifamily starts since 2013.
The backlog of multifamily units under construction has increased 56% since 2020, and the pipeline of new developments has begun to narrow. Goldman Sachs said single-family housing starts will remain largely unchanged. However, the decline in multifamily starts will not slow the normalization of rent inflation, because even if multifamily starts will decline, completions will not fall — at least not immediately, the report said. The bank also expects new lease rental growth to rise by 3% annually over the next few years. Therefore, demand is expected to remain unchanged despite an increase in rental vacancies. And it would also narrow the gap between renewals and new leases, which is used as a measure of housing inflation.
Recently, Morgan Stanley reversed course and forecast home prices to rise by up to 5% this year, after previously predicting falls in both 2023 and 2024 in separate forecasts. In addition, Morgan Stanley said in a recent report that inventory growth will be 5% next year, while sales growth will be zero, and house prices will fall by 5% by 2024.
Some home price forecasts for next year hover between above 1% and below 4% – with the exception of the AEI Housing Center. The public policy think tank expects house prices to rise 6% in 2023, followed by a 7% rise in 2024 – an upward revision compared with forecasts from Morgan Stanley and Goldman Sachs.
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