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Home Prices to Decline in 2023, Says Goldman Sachs

James L. Flint

• October 24, 2023

Goldman Sachs predicts that home prices will continue to fall for the remainder of the year due to high mortgage rates and a limited supply of houses for sale. In an October 22 note, the analysts at the Wall Street bank highlight the challenges faced by the economy's interest rate sensitive sector, citing a recent surge in mortgage rates and the likelihood of them remaining elevated in the foreseeable future.

The effect of these higher rates is twofold. Firstly, they strain affordability, making it more difficult for prospective buyers to afford homes. Secondly, they create a disincentive for existing homeowners to sell their properties. As a result, Goldman expects home sales to reach their lowest level since the early 1990s, projecting a pace of only 3.8 million sales per year in 2024.

Despite a 4.2% increase in home prices so far in 2023, the analysts anticipate a decline of 0.8% by December, leading to an overall year-over-year increase of 3.4%.

According to real-estate brokerage Redfin, the median price of a home in September was $412,000. This means that half of the homes were cheaper and half were more expensive. With a 30-year mortgage at 8%, a potential buyer would need an annual income exceeding $120,000 to afford the monthly payments on a home of this price.

Looking ahead, Goldman Sachs expects further price decreases throughout the winter but anticipates a rebound in March 2024.

Home Prices Expected to Increase, Then Fall

Based on factors such as the supply of homes for sale, buyer demand, housing affordability, and home prices, it is projected that home prices will continue to rise over the next few months. However, the bank's analysis indicates that this growth will eventually slow down and prices will start to fall by the end of the year.

According to the bank's model, home prices are predicted to decrease in January and February of 2024. However, they are expected to rise again for the rest of the year. It is important to note that this growth in home prices will be limited compared to previous years. Analysts emphasize that prices are only expected to increase by 1.3% throughout 2024 due to the tight supply of homes and the impact of high mortgage rates on affordability.

Mortgage Rates Projected to Remain High

The rise in mortgage rates is also impacting the demand for home purchases. Recent data shows that applications for mortgages have reached their lowest level in 28 years. As of October 23, the 30-year fixed rate mortgage was averaging at 7.91%, according to Mortgage News Daily.

Goldman Sachs forecasts that mortgage rates will continue to stay elevated for the foreseeable future. However, they anticipate a slight decrease to just under 7% by the end of next year.

Based on Goldman Sachs' chart, it is apparent that the majority of borrowers with existing mortgages have rates lower than the current 7%. In fact, over 60% of borrowers have rates that are four percentage points below the current level (around 3%). This significant difference in rates strongly discourages them from considering a move, as highlighted by the analysts.