Goldman Sachs says 4 cities likely to see 2008-style housing crash: report

(NEXSTAR) – Goldman Sachs predicts dark days in 2023 for some of the pandemic’s red-hot US housing markets.

The investment bank shied away from predicting a nationwide crash, but warned that residents in four cities in particular could see falling values ​​mirroring the housing collapse of 2008, according to a note to clients obtained by the New York Post.

The “overheated” markets mentioned in the memo were: San Jose, California; Austin, Texas; Phoenix, Arizona; and San Diego, California.

Goldman now believes interest rates will remain high longer than expected and warned clients that the bank is raising its forecast for the 30-year fixed mortgage rate to 6.5% by the end of 2023.

September 2022 was the first time since the housing crisis of 2008 that the average long-term mortgage rate exceeded 6%.

High mortgage rates, combined with soaring house prices, are currently driving some buyers away and contributing to a cooling housing market.

Austin, ranked the hottest real estate market in the U.S. in 2021 by Zillow, has dropped to 30th for 2023. The company’s report called the market “ice cold” and stated that homes now spend an average of 68 days on the market, more than any other major U.S. metro. The Austin Board of Realtors has pushed back against the report, saying there is still “incredibly high demand.”

But how bad can things get in 2023?

Prices are expected to fall less than 2% in cities like New York and Chicago, according to Goldman, and even grow in others, like Baltimore and Miami.

In cities where valuations have drifted far from fundamentals, the decline is expected to be far more devastating, according to the note.

“This [national] the decline should be small enough to avoid widespread mortgage stress, with a sharp increase in foreclosures nationwide seemingly unlikely,” Goldman Sachs wrote. “That said, overheated housing markets in the Southwest and Pacific Coast, such as San Jose MSA, Austin MSA , Phoenix MSA and San Diego MSA, likely to contend with top-to-bottom declines of over 25%, providing localized risk of higher mortgage delinquencies occurred in 2022 or late 2021.”

National Association of Realtors chief economist Lawrence Yun said in his 2023 forecast that he sees “hopeful signs” for the country as a whole and expects home prices to be flat on average.

“Half of the country may experience small price increases, while the other half may see small price drops,” Yun said. The exceptions, however, are markets like the San Francisco Bay Area, where San Jose is located, which he predicts will see a potential 10-15% drop in 2023.

“Mortgage rates are the lifeblood that drives home sales,” Yun said. The average rate on a 30-year loan was 6.15% this week, almost a full point below the peak of 7.08% in September 2022.

The same rate was 3.56% at this time last year, according to Freddie Mac.