In a dramatic reversal of their earlier predictions, Goldman Sachs strategists now anticipate a rise in home prices this year, a development that could further strain prospective buyers already reeling from soaring mortgage rates. The team of analysts, in a recent client note, forecast a 1.8% hike in home prices, citing a combination of a shortage in housing inventory and demand that has outstripped expectations.

The Goldman Sachs strategists highlight an ongoing tightening of housing supply, with the number of homes available for sale remaining at historical lows. The scarcity is further exacerbated by the slowest ever pace of new listings, compounded by reluctance from sellers who secured low mortgage rates before the pandemic to put their homes on the market. This supply-demand imbalance has kept home prices stubbornly high, even as mortgage rates have nearly doubled compared to three years ago.

Goldman Sachs Forecasts Rise in Home Prices

Goldman Sachs strategists are expecting an unexpected rise in home prices this year, which may add pressure to potential buyers already grappling with high mortgage rates. This is a reversal from their previous forecast of a decline in home prices.

Demand Exceeds Supply

The Goldman analysts estimate that home prices will rise by 1.8% this year due to a combination of limited inventory and stronger-than-expected demand. The analysts noted that the housing supply continues to tighten. The inventory of existing homes for sale remains historically low, with new listings being added at the lowest pace on record. This is driving positive net absorption despite low purchase application volume.

Mortgage Rates and Home Prices

Despite mortgage rates being nearly double what they were three years ago, home prices have hardly moved. This paradox is mainly due to the limited number of available homes for sale. Many sellers, who secured a low mortgage rate before the pandemic, have been hesitant to sell, leaving few options for potential buyers. The number of available homes on the market at the end of July was down by more than 9% from the same time last year, and down a shocking 46% from before the COVID-19 pandemic.

Builders Lag, Consumers Demand

Compounding the issue is the slow pace of new construction hitting the market. Many houses are still under construction, resulting in new listings being added at the lowest pace on record. This housing shortage has only increased consumer demand, keeping prices high despite the highest mortgage rates in two decades.

Interest Rates and Home Prices

The Federal Reserve’s aggressive interest-rate hike campaign sent mortgage rates soaring above 7% for the first time in nearly two decades last year. Despite rates being slow to fall back, home prices are once again increasing as buyers adjust to the new rates. The popular 30-year fixed mortgage rate surged to 7.09% this week, well above the 5.13% rate recorded one year ago and the pre-pandemic average of 3.9%.

The Goldman strategists anticipate mortgage rates will fall by 100 basis points through the end of next year, somewhat stabilizing affordability. However, they noted that the average debt-to-income ratio on conforming purchase mortgages is over 38%, a significant deviation from post-Global Financial Crisis averages.

Takeaways

The housing market continues to be a seller’s market, with demand outpacing supply. This imbalance, coupled with high mortgage rates, is keeping home prices high, making it challenging for potential buyers. The anticipated drop in mortgage rates could bring some relief, but the overall affordability of homes is still a concern.