- House prices have seen a stellar run-up but there are now clear signs a slowdown is here.
- There are big differences in the outlook for the various parts of the United States.
- Analysts at Goldman Sachs have pinpointed the most vulnerable regions, and the healthiest.
US house prices have seen a stellar run-up over recent years. But there are now increasingly clear signs a slowdown in the market is underway.
People often refer to the ‘housing market’ as a monolithic single entity, but the reality is that huge variation exists across different parts of the country. These differences are manifesting themselves in terms of regions, and from city to city.
The pandemic has changed local markets in ways that are only just becoming fully understood, and the world’s top investment banks, including Goldman Sachs, are busy figuring it all out.
The standout finding in a note from the credit strategy research team is that West Coast housing markets are seeing significantly weaker conditions than other parts of the country. The other major observation is that some metro areas are significantly underperforming.
“Recent data suggests that the extended run of home price appreciation (HPA) across the United States has waned, with a high degree of variance between metropolitan areas,” the team led by Lotfi Karoui said in the report.
They added: “Per data from Zillow, national home values appreciated by an 8.5% annualized clip in July, down from 15% in June and 19% in May. Looking across geographies, a tenth of meters experienced month-over-month declines in home values in July, concentrated in the West and Mountain West regions.”
Given this, Goldman has revised its nationwide and metro-level house price forecasts. The team now anticipates a national rise of 10.7% for full-year 2022, but only 0.65% for the full-year 2023 — close to totally flat.
In order to get average appreciation of close to zero, a lot of places will have to see falls to cancel out those that still see some price rises.
“While we think national home prices will likely avoid a correction in 2023, we expect 39% of metropolitan areas to experience price declines,” Goldman said. “As evidenced by the recent performance of large meters, we view West housing markets as particularly susceptible to a price correction. This is especially true for markets with low levels of housing affordability, such as Seattle, San Diegoand The Angels.”
“In recent months, 9% of active listings have cut prices per Zillow; these price cuts have been most common in meters that saw a sharp run-up through 2020 and 2021, and may be a sign of further weakness to come,” the analysts added.
On the other side of the coin, two regions are set to hold up well in comparison with the West and Mountain regions.
“We view South and Southeast meters as likely better positioned than West meters, supported by strong demographic trends and more favorable affordability on an absolute basis,” Goldman said.
Fundamental to the housing market is mortgage availability, and Goldman expects the cost of funding a home purchase to stay elevated for a significant period as the Fed continues to move against inflation.
Mortgage rates jumped after the Jackson Hole Economic Symposium, where Fed Chair Jerome Powell raised expectations that interest rates would stay high to fight inflation. According to Freddie Mac’s Primary Mortgage Market Survey, 30-year fixed mortgage rates rebounded to 5.66% as of September 1 after falling to as low as 4.99% a month earlier, Goldman noted.
“While certain factors that have pushed mortgage rates up are likely to be transitory, especially the widening mortgage-backed securities yields relative to Treasuries over the past 2 weeks we think mortgage rates will remain elevated without a Fed pivot,” the note said.
The high cost of borrowing is likely to slightly reduce the number of new homes built, but supply will still be ‘normalized’ after the pandemic-era slump in construction.
“We now expect total housing starts of 1.63 million homes in 2022, down from our earlier projection of 1.70 million, and of 1.57 million homes in 2023, down from our earlier projection of 1.69 million,” the bank said.
“As housing affordability challenges pressure demand for new homes, we expect homebuilders to focus more on completing their backlog of homes under construction, which is at the highest levels since the Global Financial Crisis, than on starting new construction.”