Sixteen years after the mid-2000s housing bubble burst and the global economy entered the Great Recession, a new analysis from Goldman Sachs looks back at the historic housing crash and questions today’s housing market: “How long will it last?” ?” poses the question.
Although the real estate market and the overall economy are healthier than they were when the bubble burst in 2007, there is one important factor that is deteriorating. It’s affordable.
Roger Ashworth, managing director at Goldman Sachs, said: “While housing and more general consumer fundamentals are currently in a much stronger position, affordability for gradual buyers remains , which is worse than it was at its peak in 2006, before the crash.” credit strategy paper This past week.
U.S. home prices are expected to continue rising modestly even with interest rates above 7% today. Raising interest rates alone is not enough to reverse this trend.
Ashworth said that for the U.S. to experience a significant price decline, something would have to shake up the entire economy, leading to job losses and a surge in housing stock prices.
“We expect house prices to continue to rise modestly, absent any adverse effects on the broader economy that would drive an oversupply of housing on the market or encourage higher unemployment,” he said. Stated.
Mr Ashworth predicted house prices would rise by 1.8% by the end of the year and continue to grow by 3.5% by the end of 2024.
Will the housing market crash?
Amid a nationwide housing shortage (particularly acute in fast-growing western states like Utah and Idaho), it would take a dramatic shock to create sufficient supply.
Inventory in the housing market has plummeted as potential sellers remain locked in to the low 3% interest rates available during the pandemic housing rush. Meanwhile, foreclosures remain low and the job market remains strong as the Federal Reserve continues to tackle record inflation.
Like other consumer sectors, the housing market is subject to simple supply and demand mechanisms, but “the fact that home purchases are also influenced by the demand and supply of financing perhaps complicates the situation further.” “There are,” Ashworth wrote.
Looking back at what happened from 2004 to 2009, Ashworth notes that while the U.S. housing supply began to increase in mid-2005, “home price growth eventually slowed, and by mid-2007 it had fallen below the previous year’s level.” The specific growth rate became negative and eventually reached the maximum negative growth rate.” Increase occupancy by the second half of 2008. ”
“The decline in house prices only recovered when several months’ worth of housing supply was reduced,” Ashworth wrote. “The current low housing inventory may help explain why home prices appear to be resilient despite the challenging affordability environment we find ourselves in. ”
Another factor contributing to the housing collapse of the mid-2000s was the subprime mortgage crisis, which stimulated overall demand for housing. Not only was there a high supply of housing, Ashworth wrote, “a ‘shadow’ inventory of homes for borrowers facing foreclosure was also building up even before unemployment set in.”
“Then, as nonfarm payrolls moved into net negative territory, housing prices were pushed to rock bottom as lending markets took over and borrower demand declined,” he wrote.
Today, Ashworth writes, “we see few of the same problems that caused” home prices to collapse prior to the Great Recession. “However, affordability due to high interest rates remains a major concern.”
Still, affordability concerns are compounded by the fact that “the supply of homes for sale is very limited and many mortgage borrowers are paying a fixed rate of around 7%, which is much lower than the current 30-year fixed rate mortgage.” “This is generally offset by the fact that we are using interest rates,” he wrote. “Despite current interest rates, we continue to hold the view that house prices are not on the brink of collapse. Instead, we project them as follows: rise slowly”
According to Ashworth’s paper, economists at Goldman Sachs expect real incomes to rise by about 3% next year, even though renters are straining to afford housing relative to their incomes. This could potentially ease the debt-to-income ratio.
“Barring a broader economic shock, we expect the trend of stable house prices to continue,” he concluded.