ARE WE SEEING A CRASH IN HOME SALES?

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One undeniable trend since the start of the pandemic has been the relentless rise in home prices across the United States. In 2023, this trend has continued even as mortgage rates have more than doubled, going from the 3% range to slightly above 8%., and as buying activity has collapsed.

Back in July, Goldman Sachs posed the question: "Four more years of gridlock?" And that was before the "higher for longer" rates scenario posed by the Fed started to become a reality. Fast forward to today, and Goldman Sachs is back with an updated forecast, and it doesn't bring much relief for buyers.

Goldman Sachs suggests that "sustained higher mortgage rates" in 2024 will have their most pronounced impact on housing turnover. Why? Because almost all borrowers currently have mortgage rates below the current market rate, giving them little incentive to move. This further tightens the supply in an already underbuilt housing market.

Goldman Sachs' outlook for mortgage rates staying at their over two-decade high of 8% is clear. According to the bank's chief economist Jan Hatzius, "Mortgage rates are expected to remain elevated for the foreseeable future, dipping to just under 7% by the end of next year."
 
Taking supply, demand, affordability, and home prices into account, Goldman Sachs' housing model suggests that home prices, as measured by the Case-Shiller home price index, will fall 0.8% through December of this year. However, since home prices have risen 4.2% this year, by the bank's estimate, that'll bring us to a 3.4% year-over-year increase. But don't expect 2024 to be a year of wild price surges. Goldman Sachs forecasts a more modest increase of 1.3% "as supply remains tight but high rates weigh on affordability."
 
When we add it all up, it's clear that we are in for a sustained period of reduced home buying activity. In fact, Goldman Sachs predicts that higher mortgage rates, along with the lock-in effect, will lead to existing home sales dropping to their lowest levels since the early 1990s.

What's more, the limited supply in the housing market has kept homebuilders relatively resilient to higher interest rates. Housing starts, which were 5% higher than pre-pandemic levels in September, are expected to decline by 4% in 2024, particularly due to fewer multifamily starts. This would be the lowest level of multifamily starts since 2013.

The backlog of multifamily units under construction has increased by since 2020, and the pipeline of new developments has begun to narrow. Single-family starts will remain largely unchanged, according to Goldman Sachs. However, even with fewer multifamily starts, rent inflation will continue to normalize.

Now, it's essential to mention that not all financial institutions share the same outlook. Recently, Morgan Stanley reversed its previous predictions, now forecasting a rise in home prices of up to 5% this year. This shift in perspective comes after they had earlier anticipated home prices to fall in both 2023 and 2024.

While several home price forecasts for next year hover between more than a 1% increase to less than 4%, there's an exception – the AEI Housing Center. This public policy think tank expects a robust 6% increase in home prices for 2023, followed by a 7% jump in 2024. Obviously, this is a much more optimistic outlook compared to both Morgan Stanley and Goldman Sachs.

In conclusion, it's safe to say that the housing market is facing significant challenges. The combination of sustained high mortgage rates and limited supply is likely to dampen home buying activity into the foreseeable future. While forecasts from different institutions vary, they all point to an ongoing period of increased uncertainty in the housing market.

So, whether you're a prospective homebuyer, a homeowner looking to sell, or just someone interested in the real estate landscape, it's essential to keep a close eye on these market trends and make informed decisions.