Goldman Sachs, a leading global investment bank, has released a housing market forecast for the next five years, which expects a significant slowdown in home-price growth in the U.S. The forecast is based on various factors, such as mortgage rates, housing supply, housing demand, and inflation. The forecast also provides insights into the implications of the slowdown for the economy, consumers, and policymakers.
The Forecast: A Historic Slowdown in Home-Price Growth
According to Goldman Sachs, home prices in the U.S. are poised for a historic slowdown in growth over the next few years, as the housing market faces several headwinds. The bank’s analysts expect the Case-Shiller National Home Price Index, which measures the changes in the value of residential real estate across 20 major metropolitan areas, to rise just 1.3% this year, 1.7% in 2024, 2.4% in 2025, and 3.8% in 20261. This is a sharp contrast to the double-digit growth rates seen in 2022 and 2023, when home prices surged to record highs amid low mortgage rates, limited supply, and strong demand.
The bank cites several factors that will contribute to the slowdown in home-price growth, such as:
- Higher mortgage rates: The bank expects mortgage rates to rise from their current level of around 8% to 9.5% by the end of 2024, as the Federal Reserve tightens its monetary policy in response to inflationary pressures2. This will make borrowing more expensive and reduce affordability for potential buyers.
- Low supply: The bank expects housing supply to remain tight, as new construction will not keep up with demand. The bank estimates that there is a shortage of about 3.5 million homes in the U.S., which will take years to resolve3. This will limit the choices and bargaining power of buyers.
- High prices: The bank expects home prices to remain high, as they have risen by more than 20% year-over-year in some markets4. This will make homeownership less attainable and attractive for many buyers, especially first-time buyers and low-income buyers.
- Low turnover: The bank expects housing turnover to decline, as homeowners will be reluctant to sell their homes and move due to high prices, high rates, and low supply. The bank projects that existing home sales will fall from 6.5 million units in 2023 to 4.2 million units in 2024, the lowest level since 1991. This will reduce the liquidity and dynamism of the housing market.
The Implications: Challenges and Opportunities for the Economy and Consumers
The slowdown in home-price growth will have significant implications for the economy and consumers, such as:
- Lower wealth effect: The slowdown in home-price growth will reduce the wealth effect, which is the tendency of consumers to spend more when their assets increase in value. Home equity is a major source of wealth for many Americans, and a lower growth rate will dampen their confidence and consumption.
- Lower inflation: The slowdown in home-price growth will also reduce inflation, which is partly driven by rising housing costs. Housing accounts for about one-third of the consumer price index (CPI), which measures the changes in the prices of goods and services. A lower growth rate will ease the inflationary pressures and expectations that have been worrying policymakers and investors.
- Higher affordability gap: The slowdown in home-price growth will also widen the affordability gap between different segments of buyers. While higher-income buyers may benefit from lower prices and inflation, lower-income buyers may face more challenges from higher rates and supply constraints. This will exacerbate the inequality and social problems that have been plaguing the housing market.
The slowdown in home-price growth will also pose challenges and opportunities for policymakers, investors, and industry players who need to adapt to the changing market conditions. For example:
- Policymakers may need to implement policies that stimulate housing supply, such as providing incentives for builders, easing zoning regulations, and expanding affordable housing programs.
- Investors may need to adjust their strategies and expectations for returns on residential real estate assets, as well as diversify their portfolios across different markets and sectors.
- Industry players may need to innovate their products and services to meet the evolving needs and preferences of buyers and sellers, such as offering flexible financing options, digital platforms, and personalized solutions.
Goldman Sachs predicts a historic slowdown in home-price growth in the next few years, as higher mortgage rates, low supply, high prices, and low turnover weigh on the housing market. The slowdown will have important implications for the economy and consumers, such as lower wealth effect, lower inflation, and higher affordability gap. The slowdown will also present challenges and opportunities for policymakers, investors, and industry players who need to adapt to the changing market conditions.