These four cities could see double-digit home price drops: Goldman Sachs

The housing slump could deepen further this year, according to Goldman Sachs (GS).

Data from the investment bank shows that out of the 25 largest metropolitan areas in the U.S., four cities are grappling with an oversupply, signaling a bumpy forecast ahead.

While overall housing inventory still remains tight, these four cities are seeing more homes for sale now than in January 2020. By the fourth quarter of 2024, the firm expects home prices to fall 19% in Austin, 16% in Phoenix, 15% in San Francisco, and 12% in Seattle.

Supply has increased versus demand in Pacific Coast and Southwest markets
Supply has increased versus demand in Pacific Coast and Southwest markets

Regionally, the West Coast and Southwest have been hit with an oversupply “reflecting local challenges, particularly very poor levels of affordability, pandemic-related distortions, and in certain markets a high concentration of employment in the technology industry,” Goldman noted.

Separately, in a report from Redfin (RDFN), cities like San Francisco, Oakland and San Jose each experienced declining home values between 3% and 7% in the second half of 2022.

The reason: those cities were the most expensive markets across the country, which by default means home values have more room to fall. Other reasons: the pandemic-fueled massive exodus of residents and tech layoffs.

An aerial view shows homes and apartments in a neighborhood in El Paso, Texas, on December 19, 2022. - Housing starts data about new home construction is expected this week from the Commerce Department while mortgage interest rates and fears of a recession increased this year. (Photo by Patrick T. Fallon / AFP) (Photo by PATRICK T. FALLON/AFP via Getty Images)
An aerial view shows homes and apartments in a neighborhood in El Paso, Texas, on December 19, 2022. – Housing starts data about new home construction is expected this week from the Commerce Department while mortgage interest rates and fears of a recession increased this year. (Photo by Patrick T. Fallon / AFP) (Photo by PATRICK T. FALLON/AFP via Getty Images)

Nationally, the housing outlook looks to be less dire. The bank expects home prices to fall 6.1% in 2023 as mortgage rates head toward 6.5%.

However, against this backdrop, there’s a potential risk as supply remains tight despite new homes under construction coming onto the market.

“On net, this implies a muted impact from completions on the current supply/demand balance of housing and, ultimately, prices,” the bank said, “Even if every single home under construction was completed and listed on the market immediately, the months’ supply of homes (the ratio of inventory to annual sales) would still be below historic averages.”

The pipeline of homes under construction is starting to convert into completions
The pipeline of homes under construction is starting to convert into completions

In January, builders continued to slow down home construction. Housing starts fell by 4.5% to 1.31 million annualized rate, down 21.4% from a year ago, the Commerce Department said February 16.

Other data from the National Association of Realtors notes existing home sales are slipping, while government data points to an unexpected rise in new home sales.

The bank notes that the “gradual recovery of home sales in the second half of the year should act as an additional buffer” to the supply outlook.

Even though home buying activity has turned shaky as the 30-fixed mortgage rate marches upward, the issue still remains the supply surplus of multi-family units.

The multi-family share of total housing starts over the past 6 months has been the highest since 1984 Single-family, multi-family, and total housing starts (SAAR)
The multi-family share of total housing starts over the past 6 months has been the highest since 1984 Single-family, multi-family, and total housing starts (SAAR)

Over the past six months, about 40% of total housing starts have been for multi-family units, according to Goldman. The firm noted, however, that most of these units take longer to build, which could challenge the medium- to long-term outlook for rental properties.

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