Goldman Sachs Analysts Expect Housing Market to Deteriorate Further as Rate Hikes Are Not Fully Felt

A 'For Sale' sign hangs in front of a home in Miami on June 21, 2022. Joe Raedle/Getty Images

Goldman Sachs analysts have warned that the already weak housing market may face further trouble, as the effect of high mortgage rates has yet to be fully felt.

The analysts say that the housing market is expected to slide in the coming months, as existing homes sales data for September failed to fully capture the latest increase in mortgage rates, Markets Insider reported.

“While existing home sales declined less rapidly than earlier in the year and home prices increased sequentially, we expect the deterioration in the housing market to reaccelerate in future prints,” Goldman Sachs analysts stated on October 20.

The U.S. housing market is currently in a turbulent state due to high home prices and a rise in mortgage rates.

The latest home sales report from the National Association of Realtors (NAR) showed a 1.5 percent decline in monthly home sales in September to a seasonally adjusted annualized rate of 4.71 million units.

This is a year-to-year drop of 23.8 percent and the eighth consecutive monthly decline in sales for the longest slump since 2007.

However, the NAR report has not accounted for a lag in sales data regarding the recent surge in mortgage rates. Mortgage rates have jumped roughly 2.5 percent since August, so September home sales data failed to reflect the increase in borrowing costs.

Existing home sales are normally not accounted for until a deal is finalized. The finalization process takes anywhere from one to three months to complete after contracts are signed.

The 30-year fixed mortgage rate was at 6.94 percent on Oct. 20, up from 3.09 percent in October 2021, according to Freddie Mac.

The Goldman Sachs analysts noted that the disconnect between housing supply and demand remained severe in September, despite a slight improvement in the supply of existing homes on the market, according to Markets Insider.

The inventory of existing homes available for sale rose to a 3-month supply of homes from 2.9 months.

This is still well below the 2019 pre-pandemic average of 3.9 months of homes.

Falling Homebuilder Sentiment

Many developers are being dissuaded from obtaining new permits to purchase land and build new homes due to increased interest rates and higher building material costs.

This has been a major contribution to the fall in homebuilder sentiment, thus hurting inventory.

“This situation is unhealthy and unsustainable. Policymakers must address this worsening housing affordability crisis,” NAHB Chairman Jerry Konter said in an Oct. 18 press release.

The NAHB reported that its barometer of homebuilder confidence fell to 38 on Oct. 18, down from 46 in September.

Analysts expect the Fed will raise interest rates by another 75 basis points at its next meeting on Nov. 1–2.

The central bank is pursuing an aggressive rate hike policy to control inflation. This likely means the 30-year fixed mortgage rate will jump by more than 8 percent this year, which will push out more new home buyers and tip the housing market into a worsening downward spiral.

According to economist Jeremy Siegel, who spoke to CNBC last week, home prices are likely to see the second-worst decline since the Second World War due to the aggressive Fed policy.

“That’s a very, very significant factor for wealth [and] for equity in the housing market,” he said.

He predicted that home prices would decline as much as 15 percent with the higher mortgage rates.

Siegel also believes that lagging housing market data has distorted the true rate of inflation.

Ian Shepherdson, chief economist for Pantheon Macroeconomics, told Markets Insider that the housing market has yet to bottom out and continues to plummet.

Shepherdson predicted that U.S. home prices could drop up to 20 percent in 2023.