Goldman Sachs strategists have adjusted their forecast for home prices, no longer expecting a decline but instead predicting a 1.8% increase this year. This projection could pose challenges for potential buyers who are already grappling with high mortgage rates.
The limited inventory and stronger-than-expected demand are the main factors behind the anticipated rise in home prices. The analysts note that housing supply continues to tighten, with historically low inventory of existing homes available for sale. Additionally, new listings are being added at the lowest pace on record, contributing to positive net absorption despite low purchase application volume.
The lack of available homes for sale has been a major contributor to the stability of home prices, despite mortgage rates nearly doubling over the past three years. Sellers who secured low mortgage rates before the pandemic have been hesitant to sell, leaving few options for eager buyers. The number of available homes on the market at the end of July was down by more than 9% compared to the same time last year and a significant 46% decrease from pre-pandemic levels.
Builders have also been slow to introduce new construction to the market, further exacerbating the shortage. The slow pace of new listings is attributed to ongoing construction work on many houses, according to Goldman Sachs.
The housing shortage has fueled consumer demand, which has kept prices high despite the highest mortgage rates in two decades. The Federal Reserve's aggressive interest rate hikes last year led to rates surpassing 7%, but even though rates have been slow to decrease, home prices are once again seeing an upward trend as buyers adjust to the new rates.
The Goldman Sachs strategists expect mortgage rates to decrease by 100 basis points by the end of next year, which they believe will somewhat stabilize affordability. They also highlight that homebuyers have demonstrated behavior that they consider unsustainable adaptations to elevated mortgage rates, such as higher debt-to-income ratios.
Overall, the housing market's limited inventory and strong demand are driving an increase in home prices, putting pressure on potential buyers already dealing with steep mortgage rates. The strategists anticipate some stabilization in affordability as mortgage rates are expected to decrease in the coming year.