Housing prices in the US were surprisingly resilient last year in the face of a jump in mortgage rates. Now, with the prospect of interest rate cuts on the horizon, home prices are expected to climb more than previously anticipated, according to Goldman Sachs Research.
US home prices are projected to increase 5% this year, up from the previous forecast of 1.9%, Goldman Sachs Research’s Roger Ashworth, senior strategist on the structured credit team, and analyst Vinay Viswanathan write in the team’s report. In 2025, prices are expected to rise 3.7%, compared with the earlier forecast of 2.8%. Those forecasts are underpinned in part by signs of momentum in housing prices.
Thirty-year fixed mortgages rates, meanwhile, are expected to fall to 6.3% by the end of this year, making homes slightly more affordable.
We spoke with Ashworth and Viswanathan about their forecasts for US housing and mortgages, home affordability, and how their projections differ from one region to another.
What are the factors behind your forecasts for faster US home price appreciation?
Roger Ashworth: We pulled forward a lot of the future home price appreciation we expect this year from next year. Some of that is predicated on the broader macroeconomic projections coming out of Goldman Sachs Chief Economist Jan Hatzius’ team. They pulled their rate-cut expectations forward into the first quarter of this year. We’re now expecting the 30-year fixed mortgage rate to drop to 6.3% by the end of this year. So that’s one factor.
What else is going on?
Roger Ashworth: If you look at the more recent home price index releases, the momentum is pretty high heading into this year. The annualized rate is running around 8%. We have very low inventory of houses for sale, which is generally supportive of prices, along with generally stable demand that is coming from things like household formation.
In your research note, you highlight some of the high-frequency data points that have looked encouraging of late. Can you talk about those?
Vinay Viswanathan: Taking a quick step back, what we forecast is the Case-Shiller home price index, which is a really robust and widely quoted gauge of home prices. But the issue with the index is it’s a monthly data point, and it can be quite lagged.
For that reason, we also took into account sources such as Redfin, one of the online housing brokerages, which releases weekly data on the median sales price that they see in their system. And in December, the index they maintain was up by 2% on a non-seasonally adjusted basis, which is a pretty substantial increase given the base level of interest rates we had in the fourth quarter. In addition, mortgage purchase applications have stepped up a bit with the drop in rates. While the level of those applications is still quite low, it’s a forward-looking indicator.
Roger Ashworth: We also look at the Goldman Sachs Financial Conditions Index, which isn’t just reflective of Federal Reserve policy but also borrowing rates in the broader economy. We saw a material, pretty significant loosening of financial conditions as borrowing costs dropped into year-end.
You note that inventories remain historically low. Is that primarily a function of current mortgage rates?
Roger Ashworth: Yes, that’s the whole lock-in effect. Everyone refinanced back when rates were at historic lows. If you look at the agency mortgage-backed securities market, which is the lion’s share of overall mortgages outstanding, the average mortgage rate is around 3.9%. Last time I checked, we’re now seeing mortgage rates in the mid-to-high sixes. The incentive for someone to move is quite low as a result, because if you buy the same house down the street, your mortgage payments are going to be significantly higher.
Vinay Viswanathan: That’s the main story on the existing side of housing inventory. But there’s also new inventory that typically is roughly 15% of the overall inventory. And, partly because of supply chain issues and labor availability issues, actual completions of new single-family homes have been quite low. So in addition to the locked-up existing market, you’re also not seeing much new supply coming to the market.
What are you seeing on a regional basis?
Vinay Viswanathan: Something that differentiates us from other banks is that our home price forecasts aren’t based on a national model. They’re based on different models that incorporate the largest 380 metros, and then we roll them up into one national number. So we are always cognizant of the local nature of housing.
We see housing falling into three main buckets. There are areas that were expensive and have gotten more expensive, like California and the Pacific Northwest. There are areas that were affordable and have gotten somewhat expensive, like the Southeast. And then there are areas that were cheap and are still relatively cheap, like parts of the Mid-Atlantic and the Midwest. We are the most bullish on the last group. We think the weakest markets will be in California and the Southwest. The Southeast is a bit more confusing. Affordability has gotten much worse, but there are still booming local economies and good migration trends over the past couple of years.
How does rental affordability factor into the housing equation?
Roger Ashworth: The largest demographic in the US is 30- to 39-year-olds, and it’s going to continue to grow for the next several years. That’s when life events start to happen in terms of having kids, for example. Some of those people will be making the decision to buy regardless of how rental affordability compares, but it definitely still factors in. With financing costs that much higher right now, it’s still cheaper to rent than to buy. And we believe mortgage affordability will only slightly improve in the near term under our baseline housing and mortgage forecasts.
What are some of the key risks to your outlook?
Roger Ashworth: There is a risk that the market went too low on its rate expectations late last year and that the Fed doesn’t deliver on rate cuts. If inflation remains relatively high, that adds extra cost to the consumer. And if income growth doesn’t show up and keep pace with inflation, that would hurt affordability.
The other thing we’re watching is the labor market. There has been some loosening there, but the labor market remains quite tight relative to history. We haven’t seen much in the way of job losses, which has kept the foreclosure rate relatively low. A pickup in job losses would not only cause US consumers to lose confidence and put off home purchases, it would also cause distressed sales and foreclosures to rise, putting downward pressure on home prices.
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