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Despite the ongoing pandemic, home prices have consistently risen nationwide. Even in 2023, as mortgage rates doubled from 3% to slightly above 8%, and buying activity declined, home prices continued to soar. In July, Fortune's former housing editor and ResiClub co-founder, Lance Lambert, summarized Goldman Sachs' outlook: four more years of market gridlock. Goldman Sachs' updated forecast doesn't bring good news for buyers. While the steepest declines in housing activity and prices are in the past, higher, more prolonged rates and elevated home prices are expected to persist.
Looking ahead to 2024, Goldman Sachs anticipates "sustained higher mortgage rates" will significantly impact housing turnover. With most borrowers holding rates below the current market rate, there's little incentive to move, further tightening supply in an already underdeveloped housing market. The lock-in effect observed at 7% rates throughout the year is likely to continue at 8% mortgage rates.
Regarding mortgage rate forecasts, strategists, including Chief Economist Jan Hatzius, expect rates to remain elevated for the foreseeable future, with a slight decrease to just under 7% by the end of the following year.
Taking into account factors such as supply, demand, affordability, and home prices, Goldman Sachs' housing model predicts a 0.8% decrease in home prices through December of the current year. This will result in a 3.4% year-over-year increase after a 4.2% rise during the year. Goldman's 2024 outlook suggests home prices will continue to rise, but the increase is expected to be modest at 1.3% due to tight supply and high rates affecting affordability. This marks a downward revision from their previous forecast of a 1.7% increase in home prices in 2024 made in July.
In summary, these factors collectively indicate a scenario of limited homebuying activity.
These predictions also point to another significant trend: higher mortgage rates and the resulting lock-in effect are expected to drive existing home sales to their lowest level since the early 1990s. In September, existing-home sales plummeted by 15% on a year-over-year basis, marking the lowest figure since 2010, as reported by the National Association of Realtors.
Goldman Sachs also highlights the housing market's limited supply, which has made homebuilders resilient to higher interest rates. In September, housing starts exceeded pre-pandemic levels by 5%, but this trend is expected to change. The bank predicts a 4% decline in housing starts in 2024, primarily due to a decrease in multifamily starts, which are projected to be fewer than 350,000, the lowest level since 2013.
The backlog of multifamily units under construction has grown by 56% since 2020, and the pipeline of new developments has started to narrow. Single-family starts are expected to remain relatively stable, according to Goldman Sachs. However, the decline in multifamily starts will not necessarily slow the normalization of rent inflation because even as multifamily starts decline, completions will not decrease immediately. The bank also anticipates that new-lease rent growth will rise by 3% each year over the next couple of years. So, despite an increase in rental vacancies, demand is expected to remain strong, further closing the gap between ongoing and new leases, which is used to measure shelter inflation.
It's worth noting that Morgan Stanley recently revised its forecast, now predicting a 5% increase in home prices for this year, whereas earlier forecasts had anticipated price declines in both 2023 and 2024. In addition, Morgan Stanley's note suggested that a 5% growth in inventory next year, coupled with no increase in sales, would result in a 5% decrease in home prices in 2024. Several home price forecasts for the coming year range from slightly more than 1% to just under 4% increases, except for the AEI Housing Center. This public policy think tank expects a 6% increase in home prices for 2023, followed by a 7% jump in 2024, which represents an upward revision compared to Morgan Stanley's and Goldman Sachs' forecasts.