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What four US cities could see real estate home prices fall in 2023?

The housing market soared during the pandemic but is softening as the Fed hikes rates. Goldman Sachs predicts four markets could see a sharp decline.

Goldman Sachs sees 2008-style drop in home prices for these four markets

The US housing market saw major price increases during the pandemic as Americans rethought where they wanted to live who either changed their careers or no longer needed to go to the office to do their job. The mass migration aided by historically low interest rates distorted the valuation of homes leading to overheating in metro areas across the nation.

Now a time of reckoning is coming for some of those markets as the Federal Reserve jacks interest rates to bring down inflation that peaked in June but is still higher than it’s been in over forty years. The increased cost of borrowing has hit the housing market especially hard with the average 30-year fixed-rate mortgage spiking from a low below 3 percent to topping 7 percent in November. It has since retreated but remains more than double its low.

Goldman Sachs predicts that four housing markets will see sharp declines

The high home prices, overvalued in many markets, and elevated mortgage rates pushed homebuyers out of the market reducing demand finally reverting the upward trend nationally. Not all markets have reversed course though yet, nor is it expected that the markets that will take the brunt of the downturn have completely finished rising.

Goldman Sachs advised clients in a letter earlier this month that four US cities will see a major boom-to-bust comparable to that experienced during the 2008 housing bubble bursting. At that time, across the US home prices tanked around 27 percent according to the S&P CoreLogic Case-Shiller index leading to the Great Recession.

While this deflating housing market is not like the crash 15 years ago, strategists from the bank forecast homes in San Jose, California; Austin, Texas; Phoenix, Arizona; and San Diego, California, all losing about 25 percent of their value.

High interest rates not priced in resulting in localized risk of higher delinquencies

“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),” Goldman Sachs researchers wrote, according to the New York Post.

Unlike in the previous crash, the national decline “should be small enough as to avoid broad mortgage credit stress, with a sharp increase in foreclosures nationwide seeming unlikely,” the letter read. However, in the Southwest and Pacific coast where the affected cities are located, “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.”

Other parts of the US could be spared a major correction

The investment bank paints a brighter outlook for other parts of the US “assuming the economy remains on the path to a soft landing, avoiding a recession, and the 30-year fixed mortgage rate falls back to 6.15% by year-end 2024.” Freddie Mac reported that the national average for a 30-year fixed rate mortgage dropped to its lowest level in four months sitting at 6.13 percent as of 26 January.

Cities in many Northeastern, Southeastern and Midwestern markets could see price growth likely “shift from depreciation to below-trend appreciation in 2024.” Goldman Sachs researchers see prices in Chicago and New York dropping slightly, 1.8 percent and 0.3 percent. On the other hand Baltimore and Miami will see marginal gains of 0.5 percent and 0.8 percent respectively.