Goldman Sachs strategists no longer expect home prices to fall this year, and are instead forecasting an increase that could keep pressure on would-be buyers who are already grappling with steep mortgage rates.
In a note to clients this week, the Goldman analysts estimated that home prices will rise by 1.8% this year because of limited inventory and stronger-than-expected demand.
"Housing supply continues to tighten," they wrote. "On the existing home front, the inventory of homes available for sale remains historically low. New listings are being added at the lowest pace on record, driving positive net absorption even amid paltry purchase application volume."
Even though mortgage rates are nearly double what they were three years ago, home prices have hardly budged. That is largely due to a lack of available homes for sale. Sellers who locked in a low mortgage rate before the pandemic began have been reluctant to sell, leaving few options for eager would-be 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 stunning 46% from the typical amount before the COVID-19 pandemic began in early 2020, according to a recent report from Realtor.com.
Adding to the trouble is that builders have been slow to get new construction on the market. New listings are being added at the lowest pace on record, because many houses are still under construction, the Goldman note said.
The housing shortage has only served to boost consumer demand, which is keeping prices uncomfortably high despite the highest mortgage rates in two decades.
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. But even though rates have been slow to retreat, home prices are once again on the upswing as buyers adjust to the new rates.
Rates on the popular 30-year fixed mortgage surged to 7.09% this week, according to Freddie Mac, well above the 5.13% rate recorded one year ago and the pre-pandemic average of 3.9%.
"Homebuyers have demonstrated behavior that, in our view, reflects unsustainable adaptations to elevated mortgage rates," the Goldman strategists said. "For example, the average debt-to-income ratio on conforming purchase mortgages is over 38%, a significant aberration from post-Global Financial Crisis averages."
The strategists said they anticipate mortgage rates will fall by 100 basis points through the end of next year, "somewhat stabilizing affordability."