Goldman Sachs: 4 metropolitan cities to see housing market crash

Investment bank Goldman Sachs has predicted that housing prices in four metropolitan cities — San Jose, Austin, Phoenix and San Diego — will crash this year.

On a note to clients, the bank said that those Metropolitan Statistical Areas (MSA) would likely have to deal with a 25 percent decline in housing prices due to a higher risk of payment delinquencies from mortgages that originated from late 2021 to the end of 2022.

As of now, the housing prices in Austin have dropped by more than 10 percent from their peak. In the other three cities, prices have fallen by more than 6.5 percent. According to data from Redfin, in Phoenix and San Diego, the number of consumers getting concessions in deals is the largest in the U.S.

Since the pandemic began, housing prices have grown exponentially. Increased house prices and mortgage rates pushed up the monthly payment for home ownership. Since most Americans are also dealing with other rising consumer prices, mortgage payment delinquency is more difficult to avoid.

According to Goldman Sachs, the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index — which tracks the residential real estate market — will post an annual drop of 6.1 percent by the last quarter of 2023. Financial media company Insider previously projected a smaller decline in the housing market, at 4.1 percent, within the same period.

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Goldman Sachs said house prices hit their highest levels in June 2022, meaning the full price crash will amount to about 10 percent. The investment bank added that its projection on the housing market derived from a conviction that the benchmark interest rate would remain high for a prolonged period.

"Our 2023 revised forecast primarily reflects our view that interest rates will remain at elevated levels longer than currently priced in, with 10-year Treasury yields peaking in 2023 Q3," Goldman Sachs' note read.

"As a result, we are raising our forecast for the 30-year fixed mortgage rate to 6.5% for year-end 2023 (representing a 30 bp increase from our prior expectation)."

Federal Reserve governor Christopher Waller recently said the central bank would likely raise interest rates by 25 basis points, a significant decline from the previous four rate hikes, at 75 basis points.

Regardless of the less hawkish monetary policy, Waller said the Fed still aims to achieve the two percent inflation target, meaning the monetary tightening cycle will continue.

Based on Goldman Sachs' calculation, housing affordability will worsen incrementally throughout this year, following a slight improvement over the last two months. Despite the significant plunge, the bank's analysts said the housing market would thrive again in 2024.

Predictions by other institutions

If Goldman Sachs' projection comes true, then the impending decline in housing prices this year is comparable to the price drops in residential properties across the U.S. during the 2008 financial crisis, when the NSA index showed a 27 percent decline in housing prices.

Other institutions also projected a decline in the housing market. For example, Morgan Stanley strategist James Egan recently predicted that house prices would fall by four percent this year due to lower market demand.

Wells Fargo analysts Charlie Dougherty and Patrick Barley forecasted a 5.5 percent fall in prices. Meanwhile, Interactive Brokers Jose Torres said that Goldman Sachs' prediction was possible.

Diane Swonk, the chief economist at audit firm KPMG, proposed a 20 percent drop for the home market. Swonk said the cooling tech sector contributed heavily to the crash in home prices.

"Hiring freezes in the tech sector are exacerbating declines; many cheaper markets saw astonishing appreciation due to the higher salaries tech workers brought with them," Swonk said.

Swonk further predicted that the largest declines in housing prices would happen in areas that experienced the biggest hikes in recent years.