Housing Won’t Be Affordable For Another Five Years, Goldman Sachs Says

The Fed has just trimmed interest rates by 0.5% and, according to Goldman Sachs Research analysts, the central bank is likely to deliver three more 25 basis point rate cuts by the end of the year. But it will take “a slow but steady grind” over the coming years to make housing affordable again, as house prices continue to rise, the same analysts predict.

“We think we will get back near a healthy level of affordability by the end of the decade, so it will be a five-year odyssey of slow normalization,” analyst Vinay Viswanathan said in an interview posted on the company’s website.

At the same time, he expects home prices to appreciate by 4.5% this year and 4.4% in 2025 – in each case more than predicted in April. In the past year, home prices have risen by more than the historical trend of 5% to 5.5%. Since the pandemic, he noted, the nation has experienced “the strongest home price growth we’ve seen in the country’s history: around 20% on an annualized basis.”

Viswanathan attributed the price increase to supply and demand factors that reshaped the market. He noted that the pandemic created a sharp boost in household formation that stimulated a need for housing at a time when supply was low, and many Americans were having children and reaching peak homeowner age.

Viswanathan said rising home prices would be bad news if the economy was worsening and people were losing jobs and income and were therefore unable to afford a mortgage. But he did not see that happening. “The reason we think right now that bad news is good news is that rates are falling because of concerns around employment, and we don’t think those concerns will really affect the housing market without income loss. All you’re really seeing is that the cost of buying, of taking on a mortgage, is coming down”.

He acknowledged that affordability is now the worst on record since the early 1980s but contended the market “is bucking some of the historical trends that have governed the housing sector”. In his view, with the exception of the bottom income quintile, consumer balance sheets remained in really good shape and unemployment was mostly due to temporary layoffs or “new entrants into the economy”.

Viswanathan said affordability would improve if home prices suddenly took a dive. But he thinks it’s more likely that affordability will be the result of “a slow grind,” through a combination of falling interest rates, positive income growth, and home prices that continue to rise but more slowly. The company expects a further 40 basis point drop in interest rates next year, real disposable income growth of 2.4% this year and 2.1% in 2025. If all these pieces fall into place, affordability could be achieved by the end of the decade, Viswanathan said.

He noted that the strongest home price growth has been in the Midwest, the Northeast, and California. Using a model-driven forecast for home price appreciation in the nation’s top 381 metros, Goldman Sachs predicts that price growth will be strong in California for the next two years with metros like San Jose possibly seeing a 10% increase in prices in the coming year. However, the Southeast is more problematic — especially Florida, which has experienced lower income growth on a real basis and “a massive shock in affordability” to become one of the least affordable regions of the country.