US housing market downturn to worsen in 2023, Goldman Sachs warns

Home price growth expected to stall out in 2023, Goldman economists predict

The U.S. housing market has likely tumbled into its first recession in more than a decade, and Goldman Sachs economists warned that investors should brace for the downturn to get worse. 

In a note to clients, Goldman strategists predicted that activity in the housing sector will slow sharply in the coming months, with price growth eventually falling to zero in the third quarter of next year.

"We expect home price growth to stall completely, averaging 0% in 2023," the Goldman analyst, led by Jan Hatzius, said. "While outright declines in national home prices are possible and appear quite likely for some regions, large declines seem unlikely."

The analyst note comes as painfully high inflation and rising borrowing costs have forced potential homebuyers to pull back on spending. 


home mortgage

A For Sale sign is posted in front of a property in Monterey Park, California on August 16, 2022. (Photo by FREDERIC J. BROWN/AFP via Getty Images / Getty Images)

But even as home sales decline, prices remain high because supply is still so limited. With mortgage rates soaring and a growing number of potential buyers backing out of deals — and sales dropping to the lowest level in two years — builders have become increasingly reluctant to build new homes, keeping prices high.

A sustained reduction in affordability and a decline in purchasing intentions, however, could lead to further weakening in home sales, thus reducing prices across the board, Hatzius wrote in the note. 

"Higher mortgage rates and reduced affordability are not the only drag on housing," the note said. "Existing home sales and building permits have fallen more sharply this year in regions where they increased the most in the earlier part of the pandemic, suggesting that the recent declines have also reflected the partial retreat of a pandemic-related boost to housing demand."

In all, Goldman projects sharp declines this year in new home sales (22% decline), existing home sales (17% drop) and housing GDP (8.9% drop). It projects further declines in 2023, including another 9.2% decline in housing GDP next year. 

A slew of new economic data published earlier this month shows the sector is starting to slow considerably: Home builders' sentiment about the industry plunged to the lowest level in two years, buyers are retreating from the market as they cancel home sales at the fastest pace since 2020 and builders are rethinking construction.


US housing market

A view of houses in a neighborhood in Los Angeles, California, on July 5, 2022.  ( (Photo by FREDERIC J. BROWN/AFP via Getty Images) / Getty Images)

"We’re witnessing a housing recession in terms of declining home sales and home building," Lawrence Yun, chief economist for the National Association of Realtors, said recently.

The interest rate-sensitive housing market has started to cool noticeably in recent months as the Federal Reserve moves to tighten policy at the fastest pace in three decades and withdraws its support for the economy. Policymakers already approved a 75-basis point rate increase in both June and July and have signaled that another mega-sized increase is on the table when they meet in September. 

This comes as consumers face higher mortgage rates, which rose sharply during the first half of the year as the Fed began hiking rates, but have cooled in recent weeks amid growing fears about the state of the U.S. economy and the threat of a looming recession. 

However, rates rose again last week after Fed Chairman Jerome Powell delivered a speech in which he promised to fight inflation "forcefully," regardless of the potential economic fallout. 

Fed Chairman Jerome Powell

Jerome Powell, chairman of the US Federal Reserve, from right, Lael Brainard, vice chair of the board of governors for the Federal Reserve System, and John Williams, president and chief executive officer of the Federal Reserve Bank of New York, durin (Photographer: David Paul Morris/Bloomberg via Getty Images / Getty Images)


"While higher interest rates, slower growth and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses," Powell said. "These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain."

The average rate for a 30-year fixed mortgage climbed to 5.66% for the week ending Sept. 1, according to recent data from mortgage lender Freddie Mac. That is significantly higher than just one year ago when rates stood at 2.88%.