Goldman Sachs expects home prices and mortgage rates to come in higher than originally forecasted

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Goldman Sachs is once again changing its expectations on home prices and mortgage rates.

In both cases, the firm’s analysts are revising their forecasts higher for the year, with the recent re-acceleration in home prices taking them by "surprise," Roger Ashworth, managing director at Goldman Sachs, wrote in a note for the firm's housing team.

The team now expects home prices to appreciate 2% on a seasonally adjusted basis for the year, up from its earlier forecast of a 1.8% gain. As for mortgage rates, the analysts expect the rate on the 30-year mortgage to end at 7.6% in 2023, up from 7.1% previously.

"An unfriendly byproduct of our forecasts for resilient home prices and limited rates relief is enduringly poor housing affordability," Ashworth wrote.

Read more: Mortgage rates at 20-year high: Is 2023 a good time to buy a house?

Home price 'surprise'

Goldman’s previous forecast accounted for expectations that the Case-Shiller home price index would drop 1.3% in the last five months of the year. That didn’t happen. Home prices grew 0.9% in August month over month, marking a new all-time high for the index.

"While we acknowledge that the Case-Shiller index incorporates significant time lags, a particularly important feature of this print since mortgage rates only breached 7% towards the end of August, the continued strength of the data surprised us," Ashworth wrote.

He particularly noted the outperformance of the "unaffordable" coastal markets. For instance, San Diego, Calif., saw a 1.7% price gain, while home prices in Seattle settled in higher at 1.5%

August’s home prices increase shows that even with mortgage rates hitting 23-year highs, demand is outpacing supply even as it becomes more expensive to purchase a home. That’s largely because there are not that many houses on the market, as homeowners cling to their low-financed homes and don’t want or can’t afford to move.

Read more: How to buy a house in 2023

The inventory of available single-family homes is about 1 million, compared to a 2015 level around 2 million, according to National Association of Realtors and Goldman Sachs research. The lack of homes for sale has pushed home prices up 5.8% year to date, well above the median full-year increase across more than three decades of Case-Shiller data.

Single-family homes available for sale (seasonally adjusted)
Single-family homes available for sale (seasonally adjusted) (Source: National Association of Realtors (NAR), Goldman Sachs Global Investment Research)

With that in mind, Goldman Sachs is forecasting that home prices will rise 1.9% in 2024, while in 2025, the firm expects home prices to end up 2.8% for the full year. Regionally, the figures could look different.

"We continue to expect the path for home prices to be highly varied at the metro level, particularly favoring cheaper cities with inventory constraints (i.e., older MSAs in the Midwest and Mid-Atlantic) despite the recent strength in expensive coastal metros," Ashworth wrote.

'Rates volatility remains stubbornly high'

As for mortgage rates, Goldman noted "two key dynamics" playing out in the rates market. The yield curve — a graphical representation of the relationship between interest rates of bonds with different maturities — "continues to steepen," Ashworth wrote.

"Second, rates volatility remains stubbornly high," he added, which makes it more expensive for mortgage lenders to fund loans. The secondary market that purchases securities backed by mortgages "has begun to price a ‘higher-for-longer’ mortgage rate environment," he said.

As a result, mortgage demand should stay tepid.

"Reflecting the persistence of rates, we forecast total mortgage origination to remain sluggish at $1.5 trillion for full-year 2024, similar to our full-year projection for 2023 before rising slightly to $1.8 trillion for full-year 2025," Ashworth wrote.

The team is also expecting mortgage rates to end 2024 at 7.1%, up from 6.8% previously and close out 2025 at 6.6%.

"While we think that refinance volume should increase slightly next year as more borrowers try to lower their debt service expense on recently produced mortgages, our economists’ lower home sale forecasts should pressure purchase origination," the housing team added.

Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv.

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