Posted on 01/27/2023 8:33:17 PM PST by SeekAndFind
In light of continuing skyrocketing interest rates and declining home values, Goldman Sachs predicts that home values will decline through the end of 2023.
A report published by the firm earlier this month predicted that four U.S. cities would suffer the most catastrophic drops, comparing the situation to the 2008 housing collapse.
This would be similar to the declines witnessed during the Great Recession of 2008. According to the S&P CoreLogic Case-Shiller index, home prices fell around 27% nationwide at that time.
“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,” Sachs said, the New York Post reported. “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).”
The mortgage rate jumped from 3% to 6% in 2022.
“This [national] decline should be small enough as to avoid broad mortgage credit stress, with a sharp increase in foreclosures nationwide seeming unlikely,” Goldman Sachs predicted. “That said, overheated housing markets in the Southwest and Pacific coast, such as San Jose MSA, Austin MSA, Phoenix MSA, and San Diego MSA will likely grapple with peak-to-trough declines of over 25%, presenting localized risk of higher delinquencies for mortgages originated in 2022 or late 2021.”
This year will see the lowest prices in these cities due to their separation from basic economics during the COVID-19 housing boom.
In addition, Goldman Sachs forecasts that many Northeastern, Southeastern, midwestern, and western markets may experience milder corrections.
The firm said that in New York City (-0.3%) and Chicago (-1.8%), home prices will dip, but in Baltimore (+0.5%) and Miami (+0.8%), they will rise.
“Assuming the economy remains on the path to a soft landing, avoiding a recession, and the 30-year fixed mortgage rate falls back to 6.15% by year-end 2024, home price growth will likely shift from depreciation to below-trend appreciation in 2024,” the report added.
In November, the 30-year fixed mortgage rate averaged 7.37%.
Despite the outlook for those 4 cities, Sach’s predicts the nation as a whole will not suffer an overall recession despite the majority of the public believing it will.
The econ firm reports “The threat of a U.S. recession remains alive in 2023. The consensus estimate on the probability of a meaningful downturn in the American economy in the next 12 months is at 65%, according to Goldman Sachs Research. But our own economic analysis rates that probability much lower, at 35%. David Mericle, our chief U.S. economist, and Alec Phillips, our chief U.S. political economist, elaborate on that lower risk and answer some of the big questions facing the U.S. economy in 2023 below:”
Why might the U.S. economy avoid recession in 2023?
David Mericle: Our probability of a recession over the next 12 months stands at 35%.
Part of our disagreement with consensus arises from our more optimistic view on whether a recession is necessary to tame inflation. We think that a continued period of below-potential growth can gradually rebalance supply and demand in the labor market and dampen wage and price pressures with a much more limited increase in the unemployment rate than historical relationships would suggest.
Additionally, while the Fed tightened financial conditions substantially last year, the impact on GDP growth is likely to diminish this year. Like other macro models, our analysis shows that the peak impact of rate hikes on GDP growth is front-loaded. In other words, the drag on U.S. GDP growth from recent aggressive Federal Reserve policy will fade as 2023 progresses.
Will we continue to see a drop in the job-workers gap?
David Mericle: Yes. We estimate that our jobs-workers gap — total labor demand (employment plus job openings) minus total labor supply (the size of the labor force) — has fallen from a peak of 5.9 million to 4 million. All of the decline in labor demand so far has come from a decline in job openings — a drop that is much larger than any in U.S. history seen outside a recession — rather than in employment.
While this is encouraging, we estimate that the gap needs to shrink to 2 million to be compatible with a more sustainable rate of wage growth. We expect the gap to narrow steadily this year due mainly to a further drop in job openings, but also due to a limited increase in the unemployment rate to just over 4%. The latest data tells us that job openings are still falling but the layoff rate and initial jobless claims remain very low.
What will happen to wage growth in 2023?
David Mericle: The continued strength in wage growth likely reflects both the tightness of the labor market and demands for larger cost-of-living adjustments in a year when further inflationary shocks pushed headline CPI inflation to an eye-popping peak of 9%. We expect both of these upward pressures on wage growth to diminish in 2023 as the supply-demand imbalance in the labor market continues to moderate and headlines about inflation spiking to new highs give way to headlines about inflation falling and a recession possibly looming.
By the end of 2023, we expect wage growth to slow from over 5% to about 4%. This would still be a bit too hot, but any sizeable drop would provide Fed officials with a proof of concept for the idea that gradual labor market rebalancing can dampen wage and, eventually, price pressures without a recession.
Will inflation come down in 2023?
David Mericle: Supply chain recovery and the deflationary impulse in the goods sector that it promised to bring took much longer than we expected but they have finally arrived. We expect this ongoing process to push core goods inflation negative next year, driving most of the decline in overall core inflation.
Will the Federal Reserve cut the funds rate?
David Mericle: We expect the FOMC to deliver three 25-basis-point rate hikes in February, March, and May and then to hold the funds rate at 5-5.25% for the rest of 2023. There are two possible rationales for cutting the funds rate in the future, but we don’t see either happening.
First, we are doubtful that the goods-driven decline in inflation that we expect in 2023 would be sufficient to give the FOMC confidence that inflation is moving down in a sustained way, which Fed Chair Jerome Powell has said is the criterion for cutting. In fact, I’m skeptical that the FOMC will cut just because inflation comes down. If tighter monetary policy succeeds in reducing inflation, I think the more natural path is to just leave the policy rate unchanged until something goes wrong.
The second and more likely rationale for cutting at some point would be that the economy is entering recession or threatens to do so without an easing in monetary policy. We have cuts in our forecast over 2024-2026, but we do not intend for the timing to be taken literally and instead think of our path of cuts as a placeholder for an uncertain future date when something goes wrong.
Residential real estate prices will go down everywhere before it’s over with. The Fed has real estate in its sights. Anyone notice gasoline prices going up, yet?
So happy to see Aushit and San Joradorado on the list.
That sure messes with my plans!
No one in gov in my lifetime has caused as much damage to this country and the people, as Joe Biden and Barry Obama has.
And gotten away with it.
Lauded, praised..
By the tribes who don’t have a clue
If you bought a house in the last two or three years you are going to be under water. If you have more than 30% equity, you are going to be just fine.
If you have cash, you have a great opportunity.
Mortgage paid off nine years ago.
TOTALLY debt free since May 2020.
Then you will do well.
People focus on home values, but if you are living in your home, the value means nothing. Your house could be worth $100,000 or $10,000,000, it does not matter, you got to live somewhere.
Not quite.
"Value" is not necessarily the same as "assessed valuation" for the purpose of annual rent to the government aka "property tax".
Sometimes "assessed valuation" can be underwater relative to actual market value.
Gas prices are creeping up where I am.
Yep. Up 40 cents in the last week and a half
A lot easier to get an equity loan if you have.. equity. Not saying it’s a great idea to do one, but in an emergency it can be a lifesaver.
Austin is a stupid city. It won’t add a highway so you get stuck in it going through, which you always want to do when facing the idea of Austin
My friends say they have to use holy water going through en route to A&M. ‘You too? … we do that too!’ What is that?
It’s leftist unfriendly. The leftists in Texas are unfriendly.
The whole of Dsanta Clara county has been over priced for decades
Only four cities? Sure.
For San Jose, a 25% correction in house prices will only wipe out about half of recent gains.
Before the 2007-09 debacle, I remember hearing two radio commercials that really stood out. One was the classic “Pull the equity out of your home.” Sometimes they tried to justify it by saying you could make home repairs, or install a swimming pool to raise property value. The other category, reason, to “pull the equity out of your home” was ridiculous: buy a boat, take a cruise, etc.
The other radio commercial was way weird. It stated almost anyone could qualify for a 120%-140%, Nothing Down, Home Mortgage. So....nothing down, no skin in the game (down payment) AND extra cash! They too had their own ideas of how to spend the ‘extra cash.’ Boats, trucks, cruises, etc.
Since that time, whenever I hear the phrase “pull equity out” I just shake my head, hoping people will wake up.
“Since that time, whenever I hear the phrase “pull equity out” I just shake my head, hoping people will wake up.”
You’re viewing this from the POV of someone who intends to finish paying something off. Increasingly, Americans are “living in the here and now”, and if they die then how the assets are disposed of is someone else’s problem. If it lets them enjoy a new car or fine dining or expensive vacations, then they’ll take it. The decline of marriage and children has contributed greatly to this; I suspect it caused the birth of the “reverse mortgage” business. If there are no heirs, why not spend the money now?
No reason why Freepers cannot share a winter home(s) in Az. Just be there on Election Day.
Right - though they’ll scrutinize ballots in any Orange Man strongholds (or just throw them out wholesale).
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