Let’s discuss the peak-to-trough housing decline estimate by Goldman Sachs and the 2023 forecast by Realtor.Com.
Chart Notes
- OER stands for Owner’s Equivalent Rent. It it the price one would pay to rent a home, unfurnished and without utilities.
- Home prices wildly disconnected from the CPI in 2000 and in 2013. The disconnect accelerated in 2020. The Fed ignored all three occasions hoping to make up for “lack of inflation”. The Fed “succeeded” in producing inflation beyond it’s wildest dreams.
- There is a two-month lag in Case-Shiller reporting. The latest report is for March and that represents sales primarily made in January and February.
Goldman Sachs Estimates
Goldman Mortgage Rate Forecast
Realtor.Com View
“#NEW http://Realtor.com’s forecast model expects the median existing home sales price to fall -0.6% in 2023. That’s a downward revision.”
Ten City View
Price Declines to Date
Price Decline Key Points
- Home prices generally peaked in June or July of 2022.
- Chicago is the 10-city exception. Chicago hit a new high in March.
- However, Chicago barely participated in the post-pandemic bubble as shown in the second chart.
My View
A peak-to-trough decline of only 5.7 percent with mortgage rates at 6.4 percent seems like fantasyland material.
Existing Home Sales Rise Slightly in May, Sales Mixed
On June 22, I commented Existing Home Sales Rise Slightly in May, Sales Mixed
Key Highlights
- Existing-home sales recorded a minor gain of 0.2% in May to a seasonally adjusted annual rate of 4.30 million.
- Sales retreated 20.4% from one year ago.
- The median existing-home price for all housing types in May was $396,100, a decline of 3.1% from May 2022 ($408,600). Prices grew in the Northeast and Midwest but fell in the South and West.
The median price of existing homes is down 3.1 percent from a year ago. Realtor.com expects a decline of 0.6 percent.
The Starter Home Is No More, Even in Second Tier Markets
On June 7, I noted The Starter Home Is No More, Even in Second Tier Markets
in 100 out of 100 cities the average renter could not afford to buy a lower-third priced home.
The GS Story
Despite homes being the most unaffordable in history, despite mortgage rate near 7 percent, despite the Fed fearful of cutting rates and stoking more inflation, and despite a huge boomer die-off coming and implied liquidations, home prices will not decline more than they already have.
This is called revising your forecast, forever into the future, based on extreme valuations and actions you see today.
I’ll Take the Under
On the over-under line, I will take the way under on the G/S peak to trough forecast and the way under on the Realtor.Com forecast for 2023 as well.
I firmly believe there are people out there who would like to sell but can’t because they don’t have enough money to pay the closing costs and the realtor fees. These people are mostly investors who have close to zero net cash flow after recent property tax and insurance increases. The “easy” yet stressful path is to do nothing rather than to look for ways to somehow generate, say, $35K in up front cash needed for the sale.
GS wants to make money coming and going. 1.) Selling mortgages to home buyers. 2.) When the 4 year interest rate cycle bottoms by the end of the year, sell the mortgages at a profit.
The decline is already over. Prices have been increasing the last several months in all markets. Boise up 9%. San Francisco up 15%.
There’s so much pent up demand that when the Fed drops interest rates the housing market is going to go parabolic and 2021 peak prices will seem cheap by comparison.
I think the biggest factor in what happens in the housing market is whether or not we continue to allow residential real estate to be treated as an investment. Banks, hedge funds, institutional investors etc. have deep pockets. The amount of residential real estate that is being bought up by investors, is increasing at an alarming rate, hence the disconnect in housing prices. They buy properties as investments, and rent them out. The fact that mortgage rates for potential home owners is relatively high is good news for them, less competition means lower prices. As more people are forced out of the housing market and become renters, rents will continue to rise, making investment in residential real estate more profitable. It is a vicious cycle, that has very little to do with historical trend lines.
I see your point but rents right now are not at all keeping up with house prices. So if these investors are doing that they are losing a lot of money for their investors and many who have tried that like Zillow and another one who escapes me have gotten out of the business because they were bleeding money. That said, real estate investment has been around since the beginning and I don’t trust government to limit it without cutting out the small guy. As a matter of fact, if they did limit it, they would only cut out the small guy because they don’t get big campaign contributions from the small guy, they get them from black rock
I don’t trust the government to regulate it either, however if the trend keeps up I think it will be the biggest factor in the market. Investors are getting to be a larger and larger share of the market, and they tend to buy the lower priced properties and that is a problem for average first time homebuyer. As for rents not keeping up, I am not sure about that, the headlines I have seen all indicate they are going up, but I don’t follow it, so that may have changed.
We are living in crazy times when common sense has flown the coop. Where’s Thomas Reid when you need him?
The 3% mortgages that so many have is going to affect this greatly. Absolutely no one is going to move with a 3% mortgage unless they absolutely have to. We’ve all discussed that here many times.
So it’s possible that the decline might only be 5.9% simply because volume of sales dries up entirely as everyone stays put and waits for and hopes for rates to go back down into the 3% range again.
More important to know or at least try to forecast is how long this trough is going to be. Will it be 3 years time, 5 years, 10 or more than that.
There are massive levels of pent up demand and fear of missing out. Home prices are not going to meaningfully drop in desirable areas with jobs. There have already started rising in the Puget Sound region after a small dip. There simply is not enough single family homes near job centers. I expect home prices to easily be 30% higher by the end of the decade in these locations. It wouldn’t be surprising if they have increased 80%. There is going to be a massive frenzy once it’s clear the rates are dropping.
“in 100 out of 100 cities the average renter could not afford to buy a lower-third priced home.”
The WEF doesn’t want people to own property, anyway.
nice analysis. houses seem to be trading like penny stocks. no volume. as the demographic and other things which make people have to sell happen we will find out. i’d suspect we won’t know for another few years. housing moves in very slow and very long waves……..decade or two up, and 5 to 8 years down. i got spooked and sold all my investment residential properties last year. i love having luck on my side. top of the market for my city i was mostly invested……….i’ll wait another few years and assess. riding these waves takes patience and other pursuits to fill the gaps just sitting on the beach for the waves.
Bernanke’s “wealth effect” doesn’t work. Link: “Changes in Wealth and the Velocity of Money”.
LSAPs artificially suppressed interest rates. Bernanke, pg. 287, “Lower long-term rates also tend to raise asset prices, including house and stock prices, which, by making people feel wealthier, tends to stimulate consumer spending-the “wealth effect”.
You can blame it on Volcker. Paul Volcker was quoted in the WSJ in 1983 that the Fed: “as a matter of principle favors payment of interest on all reserve balances” … “on rounds of equity”. [sic]
The Fred chart shows monthly housing starts (not seasonally adjusted–hence the annual variation) which tends to hide cycle and trend components. Mish’s first chart of housing prices and CPI etc does a far better job of revealing what is happening over the years.
FYI, your underlying assumption that there is a housing shortage is NOT reflected in housing starts UNLESS you have unfilled demand whch does not appear in the data, merely that supply adjusts to ‘unknown factors’ and seasonal factors.
re: “UNLESS you have unfilled demand”
AD = M*Vt
That housing prices have historically tracked inflation (CPI etc) matches the inherent economic logic: there is no reason why house prices would increase at more/less than the inflation rate if there has not been a shift in the demand and/or supply lines. We saw this in 2000-2006, with a bust back to the trend line (of inflation). Speculation post 2011-12 and Fed f*(kery created the current overpricing. The question is (when) do housing prices revert to the mean?
Long term housing supply at the national level) is typically a function of demand for replacements and new housing (driven by household formation rates and social changes), with adjustment to supply within a few years, yet creating a product that will last 50-plus years. Also there are substitutes (rentals, RVs, etc) All this has definite pricing impacts. When I hear the current local cost of construction per sf is $300-400, I’m ‘amazed.’
Demand is also relatively predictable years in advance (birth rates, immigration, income, tastes and preferences etc). Logically, one turns to factors that threw the market out of whack–Fed f*(kery, Covid, gov’t policy, and the fact that real estate is fixed in location.
To continue…
Take away those factors, or they expire over time, and the net result is a lot of overpriced homes without buyers. What happens then depends on the Fed and the eunuchs in Congress. However, there is a cautionary note: for each bailout, learning occurs. It becomes increasingly harder to revert to rational, unsubsidized markets, the ultimate failure becoming far more devastating. Like the Titan, it implodes.
Supply and demand are also a bit fickle. People need a roof over their heads. There will be downgrades and combining of households … but not sure how far that can run. As for supply, I’m more than a little surprised that some areas (like here in central NC) are building on every square inch they can find. The current Boomer trend (retirement) is not likely (IMHO) to have a huge impact … but the next Boomer trend should free up a lot of homes.
There’s a strong location effect currently in the Carolinas. House prices (and construction) are way up as people relocate. Jobs and lifestyle!
re: “That housing prices have historically tracked inflation”
That history ended in 1995. There will be no revert to mean. Single family unit volumes haven’t kept up with the trend in demographics clear back to 1959.
https://fred.stlouisfed.org/series/HOUST1FNSA
I used to think housing prices would decline a lot through this recession. However after seeing a presentation by Barry Habib of MBS Highway, I think that prices will be relatively flat. His historical data shows that prices usually increase slightly during recessions, except for the 2008 GFC which was a real estate loan issue. His reasoning (besides supply and demand which shows household formation to significantly exceed supply) is that if there is a recession and mortgage rates drop (even only one or two percent) there will be about five times more people that will become eligible for loans (due to rate reduction) than those who will become ineligible (due to loss of income or job). Another reason for price increases will be that financial repression (interest rates lower than inflation rate) will be the only means for the government to handle the huge debt load.
As American Yale Professor Irving Fisher pontificated, economics is an exact science. The rate-of-change in monetary flows, the volume and velocity of our means-of-payment money supply, the proxy for inflation, fell during the GFC. I.e., Bernanke bankrupt America. This time around it is merely decelerating. Powell doesn’t know what he is doing.
Nobody, and I mean NOBODY has any idea of what’s going to come of the housing market over the next 24 months or so.
The entirety of the outcome is fully dependent on whether or not Congress & the Fed intervenes on the behalf of homeowners in the form of rent & mortgage / QE relief when a real recession eventually arrives.
And with the myriad of precedents set by our outlandish pandemic response, I wouldn’t bet against Congress or the Fed, as the old saying goes.
yep
I believe you are right that they will intervene as nobody is better at solving problems than the ones who created them (yes, that was sarcastic). My cousin bought a home in SW Florida in 2008 after a double slam. Home started at 250K, after that company went bankrupt, back on the market for $120K … my cousin eventually bought it for $59K. Florida let the market do it’s magic and the home is worth between $300K and $400K. The market really is the best way forward, but it doesn’t give extra power to our political apparatus … so they will jump in and convince the easily led that they are the heroes.
“Despite homes being the most unaffordable in history, despite mortgage rate near 7 percent, despite the Fed fearful of cutting rates and stoking more inflation, and despite a huge boomer die-off coming and implied liquidations, home prices will not decline more than they already have.”
I think you left out the biggest problems: insurance & property taxes. In California and Florida, insurance is either too expensive or not available and in other states property taxes are becoming excessive for residential and business property owners. So much so that Texas GOP is fighting itself over what to prioritize.
https://www.texastribune.org/2023/06/15/greg-abbott-dan-patrick-veto-property-tax/
Totally agree with insurance & property taxes. Our taxes this year went up a whopping 22%. Basically, the local assessor’s office realizes that prices have peaked, so they’re pushing everyone’s assessments up to as close to fair market value as they can. This will ensure maximum funding as the housing market plays out over the next 2-4 years. And insurance is going to do its best to catch up with higher premiums despite most material costs being down notably.
That is not how it usually words. Tax reappraisals are done by computer typically every two years), using past sales to generate current values. Two years from now, taxes might be 22% lower.
I have owned 5 houses, and my local appraiser’s office has never appraised my home more than about 80% of it’s fair market value. I’m sure everyone’s mileage varies from start to state, but it’s quite obvious what they’re doing. And, I guess that I can’t blame them. Here in GA and the many of the local counties, everyone working in G-jobs like myself (teacher) has gotten significant raises. The good news is that, for now, most likely my property taxes have peaked.
That’s not how property taxes work. They set the budget first then divide by the property valuation to determine a tax rate. The total property valuations no effect on the budget
And you don’t think that that program they didn’t think they could afford suddenly makes the cut based on higher valuations?
Sounds reasonable to me. I’ve maintained over the last two years, that every county in metro Atlanta is swimming in money due to rising home values and property taxes. This extra cash along with $1.5T annual federal deficits going forward are very inflationary. Without a recession, there’s no way core CPI moves down towards 2% anytime soon. With mounting consumer credit card debt, car payments, medical costs, food costs, insurance costs, I just don’t see how things really don’t start to crack for the bottom 70% within the next 12 months or so.
frankly, I have been of the same mind, but I’ve been of that mind for almost 20 years. Just the deficit alone. I did some calculations on reparations which the senate is looking at. If we give 1/5 of the proposed San Francisco package to 50% of African Americans in the nation … after admin costs, it will be about $200T (we’ll be calling $32T in debt “the good old days”). With consumer credit at its highest point ever … I keep waiting for the dam to break … but politicians keep on kicking it down the road.
Goldman has to call it this way for the popular press (and the moron masses), otherwise they contribute to panic. While it is entirely possible that the housing market stagnates for many years, I suspect Goldman’s advice to their major clients might be quite different. There is a faux-debt bomb of global consequence, and it is very clear that bankers are worried, from BIS on down.