Goldman Sachs shares the 4 cities that will experience a 2008-sized crash in home values. They also explain why they think home prices will fall further across the US than they initially thought.

Attention homeowners and investors in real estate: Goldman Sachs has some bad news. Home prices will fall more than expected in 2023.

The bank’s strategists stated that they were worried about the housing market and predicted that the S&P Case-Shiller US National Home Price NSA Index would fall by 6.1% in the fourth quarter of 2023. They had previously estimated that the decline in US National Home Price NSA Index will be -4.1%.

According to them, San Jose, Austin and Phoenix will see peak-to trough declines greater than 25%. These declines will be comparable to those that occurred in the United States a decade and a half ago. According to the S&P CoreLogic CaseShiller index, US home prices fell by around 27% during the mid-2000s housing crises.

According to Ronnie Walker, Vinay Viswanathan and Lotfi Karoui (the most recent peak in home prices was June 2022), the national decline will be about 10%. They predicted that prices would begin to show positive growth in 2024.

They are more bearish now because they expect that mortgage rates will remain higher than investors anticipate.

“Our 2023 revised outlook primarily reflects the fact that we believe interest rates will remain elevated at higher levels for a longer time than is currently priced in. The 10-year Treasury yields are expected to peak in 2023 Q3. The strategists stated that they are increasing their forecast for the 30-year fixed rate mortgage rate to 6.5% by year-end 2023, which is a 30 bp rise from the previous expectation.

They said, “This path would cause affordability incrementally to worsen after a slight improvement in the past two months.”

Housing affordability has declined significantly since the beginning of the pandemic. Skyrocketing home prices, mortgage rates, and rising rents have caused a rise in monthly housing costs relative to salaries.

Walker, Viswanathan and Karoui see national home prices declining by 10% peak to trough. However, prices in cities where home prices have risen above average will see their prices fall more. Four metropolitan areas were specifically mentioned.

“Overheated housing markets on the Southwest and Pacific coasts, including San Jose MSA(CA), Austin MSA(TX), Phoenix MSA/AZ, and San Diego MSA) (CA), will likely experience peak-to-trough drops of more than 25%. This presents a localized risk for higher delinquencies in mortgages originated in 2022 and late 2021. MSA is Metropolitan Statistical Area. It refers to a city’s larger surroundings that are important economically and population-wise.

What are other firms saying?

Goldman Sachs isn’t the only Wall Street bank calling to see further price drops in 2023.

In a January note, James Egan , a strategist at Morgan Stanley, stated that home prices could fall by 4% due to stagnant demand. The Wells Fargo economists Charlie Dougherty, and Patrick Barley expect a decline of 5.5%.

Some are calling for even greater declines. Interactive Brokers Senior Economist Jose Torres called for 25% drops, while KPMG Chief Economics Officer Diane Swonk sees as high as a 20% drop.

Swonk linked her call to the slowdown of tech sector job growth. In recent weeks, companies like Google and Microsoft cut thousands of jobs.

She stated that “Hiring freezes within the tech sector are exacerbating the declines; many lower-cost markets saw remarkable appreciation due to the higher salaries of tech workers.”

At both the city and regional level, it seems that the worst price drops will occur in the cities that experienced the largest price increases over the past few years. Zillow data shows that prices in Austin have fallen more than 10% since their peak. San Jose, San Diego and Phoenix, however, are down more than 6.5%.

Some markets are becoming more attractive to buyers because of the softening demand. Redfin reports that San Diego and Phoenix are the markets with the highest proportion of buyers receiving concessions and deal sweeteners.

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