Four cities identified by Goldman Sachs to be on track for record home price drop

‘Many cheaper markets saw astonishing appreciation due to the higher salaries tech workers brought with them’

Four cities have been identified by Goldman Sachs as being on track for record drops in home prices.

The investing giant announced in a note to clients earlier this month that home prices will decrease more this year than they previously expected.

The bank said their preview of the housing market had grown worse and that they expect the S&P CoreLogic Case-Shiller US National Home Price NSA Index to drop by 6.1 per cent year-over-year by the fourth quarter of this year.

The previous estimate for the same time period was a drop of 4.1 per cent, according to Insider.

The bank noted that home prices peaked in June of last year, meaning that the full drop will amount to around 10 per cent.

Goldman analysts Lotfi Karoui, Vinay Viswanathan, and Ronnie Walker said that home prices would start to grow again next year.

The reason for their negative prognosis is that mortgage rates look likely to stay higher for a longer period than investors think.

“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. 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 bank’s analysts said. “This path would cause affordability to worsen incrementally, after a slight improvement over the past two months.”

Since the beginning of the pandemic, housing has grown increasingly expensive amid spiking home prices and mortgage rates pushing up the monthly payment required to own a home.

Goldman’s strategists pointed to four Metropolitan Statistical Areas (MSA) – cities – where they expect the average price of a home to plummet beyond the average.

An MSA includes a city’s larger surrounding areas that are important economically and in terms of a city’s population.

“Overheated housing markets in the Southwest and Pacific coast, such as San Jose MSA (CA), Austin MSA (TX), Phoenix MSA (AZ), and San Diego MSA (CA) 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,” they said.

Drops of this magnitude would be comparable to the price drops seen across the US about 15 years ago.

During the last housing crisis, home prices dropped about 27 per cent, the S&P CoreLogic Case-Shiller US National Home Price NSA Index shows.

James Egan, a strategist at Morgan Stanley, wrote in a note this month that he expects home prices to fall by four per cent this year because of lower demand.

Charlie Dougherty and Patrick Barley of Wells Fargo forecasted drops of about 5.5 per cent.

Jose Torres of Interactive Brokers suggested that drops of 25 per cent are possible, while Diane Swonk of KPMG said a 20 per cent drop could be in the cards.

She noted the cooling tech sector, where big firms are cutting jobs by the thousands.

“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,” she said, according to Insider.

It’s likely that the largest declines in home prices will come in areas that saw the biggest spikes in the last few years.

In Austin, prices are more than 10 per cent lower than they were at their peak and in San Jose, San Diego, and Phoenix, prices have dropped by more than 6.5 per cent.

Phoenix and San Diego are the top two markets in the US in terms of the number of buyers that get concessions when making deals, according to Redfin.