Is Slow Growth the New Normal for Home Prices? Goldman Sachs Thinks So

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The rapid appreciation the pandemic brought to home prices won’t return anytime soon, but the housing market also isn’t expected to crash—at least not on a national level. 

That’s according to the Goldman Sachs forecast for the Case-Shiller National Home Price Index through 2026. Housing supply constraints and high mortgage rates are currently putting pressure on housing prices from opposite sides. Prices nationwide are resilient to decline due to tight supply, but demand is also dampened by affordability concerns, which is preventing appreciation on par with the last decade. 

Mortgage rates increased slightly in the week ending July 27 to an average of 6.81% for a 30-year, fixed-rate mortgage. While this was down a bit from the November peak, rates are high enough to put downward pressure on price growth. 

But current homeowners who bought when mortgage rates were low are also hesitant to sell—about 82% of respondents in a Realtor.com survey said they feel “locked in.” That’s one of the factors suppressing housing inventory across the country, along with a labor shortage in the construction industry and high building material costs that have slowed down new builds. Low supply is putting upward pressure on home prices, and it’s worse in some areas than others. 

It will take a while for that to change. Some analysts predict that mortgage rates will drop below 6% in 2024, but it’s unlikely they’ll return to 3%. Indeed, Lawrence Yun, chief economist at the National Association of Realtors, predicts we won’t see rates that low again in his lifetime. 

Meanwhile, Goldman Sachs expects rates to hover around 6% for years. And though homebuilder sentiment is improving, new housing starts dropped 8% in June after an unexpected surge in May. Homeowners with low-interest mortgages are also likely to stay put until conditions change. 

Without much movement on the supply or demand side, Goldman Sachs predicts relatively stagnant prices over the next four years. 

Slow Price Growth in the Coming Years

Since 1976, national home prices have appreciated an average of 5.5% per year. In 2021, work-from-home arrangements and record-low mortgage rates caused housing prices to grow 19%. That makes the Goldman Sachs forecast look pretty meager. 

The firm’s model predicts:

• 1.3% growth in 2023
• 1.7% growth in 2024
• 2.4% growth in 2025
• 3.8% growth in 2026

That will mean the end of 2026 will bring an average appreciation of just 4.5% from the June 2022 housing price peak and an increase of only 10.1% from the trough in January 2023. For the forecast to hold up, it would require a decline in prices before the end of the year since prices were up 2.4% year over year as of April. And in their latest housing note, Goldman Sachs researchers predict “weaker home price growth in coming months.” 

This is Actually Good News

Housing price stabilization is perhaps the best outcome real estate investors could have hoped for. Back in October 2022, Goldman Sachs predicted that prices would fall 5% to 10% from their peak, but the actual correction has been more mild. Furthermore, the likelihood of a recession, according to economists, appears to be declining. Goldman Sachs now pins the probability of a recession over the next year at 20%, down from previously forecasted chances of 25% and even 30% last July. 

The firm’s predictions for inflation and unemployment are rosy as well. The Consumer Price Index is expected to rise 3% in 2023, 2.8% in 2024, 2.4% in 2025, and 2.4% in 2026. And the unemployment rate is predicted to remain under 4% through 2026. 

This is what the Federal Reserve had in mind when the Federal Open Market Committee began raising the federal funds rate in March 2022. The goal: Slow down economic activity enough to curb inflation without causing rising unemployment or a housing market crash. While there’s still uncertainty about whether the Fed has actually achieved a soft landing, it’s starting to look more likely. It’s an ideal outcome, and historically, it’s been pretty rare. 

On the other hand, the behavior of real estate prices has been more consistent with historical trends. The principle of mean reversion essentially dictates that what goes up must come down — rapid price growth beyond what is typical for a market has historically been followed by declining prices or slowing price growth, so prices revert to their expected value, given the long-term average appreciation rate. It’s logical for a price correction to follow the housing price boom that occurred between March 2020 and June 2022.

Of course, the correction is much worse in some markets. For example, in Boise, Idaho, and Austin, Texas, the median listing price per square foot has fallen in both places nearly 8% year over year, according to Realtor.com. On the other hand, in the hottest markets, prices are up an average of 8.9% year over year as of June. 

The Impact on Investors

Real estate investing involves strategy and timing. If we were all just along for the housing market ride, it wouldn’t be nearly as exciting. 

Buying an investment property during a time of stagnant prices requires research into the price movements of individual markets—which is always the case. Slow price growth won’t meaningfully change how you evaluate deals. It’s still about crunching the numbers and making predictions based on the information available to you. 

For example, GOBankingRates chose the best markets to capture long-term appreciation by analyzing which below-median price markets had higher expected growth rates than the national forecast. The No. 1 spot here goes to Columbia, Missouri.

If your goal is cash flow, you might consult RentCafe’s analysis of the hottest rental markets based on factors like occupancy rates and applicants per unit and find the markets with the best price-to-rent ratio. (Here, Miami takes the top spot.)

Should you wait to invest until mortgage rates come down if prices aren’t expected to rise much, according to this forecast? Not necessarily—Goldman Sachs predicts that mortgage rates could stay around 6% in the coming years. So if the Case-Shiller Index rises to $322,280 by 2026, as predicted, and mortgage rates only come down from 6.8% to 6%, the monthly mortgage payment on a typical home would only decline ever so slightly. 

In the meantime, you could be missing out on years of cash flow. Plus, you’ll have the opportunity to refinance if mortgage rates are further reduced. But of course, the right decision is personal and highly market-dependent. 

The Bottom Line

The Goldman Sachs forecast is just one firm’s opinion of what will unfold in the housing market. These predictions change frequently — Goldman Sachs has adjusted expectations several times in the last year and a half. While it may seem that the U.S. has avoided a housing market crash, the future of home prices is still unknown. 

As a real estate investor, it’s important to keep a finger on the pulse of the housing market in your area and react based on the knowledge available to you, keeping in mind that changes can occur and diversifying accordingly.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.