Goldman Sees US House Prices Falling 5% to 10%

The recent weakness in the housing market, combined with mortgage rates close to 7%, have led to some downwards revisions to house price forecasts. For example, from Goldman Sachs economists today:

Our G10 home price model suggests sizable nominal home prices declines from the peak of around 15% in Canada, 5-10% in the US, and under 5% in the UK. … We view the risks to these estimates as tilted to the downside

emphasis added

This is a significant downgrade from Goldman’s “stall” forecast from just a few weeks ago.

And on current data, Zillow forecasts Case-Shiller a month early, and I like to check the Zillow forecasts since they have been pretty close. From Zillow Research: July 2022 Case-Shiller Results & Forecast: Rebalancing Power

While the summer heat was in full swing in July, the housing market had other plans with a chilling wind of declining home values settling in. National home values were still increasing on a double-digit basis over last year, but at a much slower rate than in the spring. Affordability constraints have set in motion a rebalancing of power in the housing market. ...

Annual home price growth as reported by Case-Shiller are expected to slow in all three indices. … S&P Dow Jones Indices is expected to release data for the August S&P CoreLogic Case-Shiller Indices on Tuesday, September 27.
emphasis added

The Zillow forecast is for the year-over-year change for the Case-Shiller National index to be 13.8% in August. This would the lowest year-over-year increase since March 2021. The Case-Shiller National index was up 20% YoY as recently as the May report, and then declined to 18.1% YoY in June, and to 15.8% YoY in July. This is a sharp slowdown in YoY price increases and suggests falling prices month to month (Zillow says -0.1%, but my guess is closer to -0.5% in August seasonally adjusted).

Earlier this year, I suggested that a stall in nominal prices - with falling real prices (inflation adjusted) - was the most likely scenario. And I argued that real prices would take a long time to recover, see: House Price Declines: How Long for Real Prices to Recover?

It now appears house prices are falling even though inventory levels are still historically fairly low (by measures of active inventory or months of supply). Here is a graph from Realtor.com showing active inventory for the last six years: September 2022 Monthly Housing Market Trends Report

Active inventory is up from last year and almost back to 2020 levels, but inventory is far below the levels in 2017 - 2019. And month-of-supply is still low too.

Here is a look at existing home months-of-supply (inverted, from the NAR) vs. the seasonally adjusted month-to-month price change in the Case-Shiller National Index (both since January 1999 through July 2022). Note that the months-of-supply is not seasonally adjusted.

The last three months are in black showing a possible shift in the relationship.

In July, the months-of-supply was at 3.2 months, and the Case-Shiller National Index (SA) decreased -0.24% month-over-month.  This appears to be an outlier with prices falling even though months-of-supply is still somewhat low. NOTE that the NAR appears to include some pending sales in their inventory, and inventory is probably up more than the NAR is reporting.

There is no question house prices are very high by most historical measures (real prices, price-to-rent, price-to-income). But inventory is still low, and lending has been reasonably solid. However, it now appears nominal house prices have peaked (as housing economist Tom Lawler suggested earlier), and national nominal prices will decline.

I’ll update my house price forecast soon to reflect the weaker outlook.