Goldman Sachs no longer thinks housing is at risk of recession

Wall Street remains at odds over whether the U.S. economy is at risk of falling into a recession. But one area bankers agree is safe from a downturn is the U.S. housing market.

Goldman Sachs has recently revised its home price trends for 2023. Instead of calling for a 2.2% decline in prices, the bank now predicts a slight increase for 2023.

"We are revising our home price forecasts higher, to 1.8% for full-year 2023 vs. -2.2% prior, and 3.5% in 2024 vs. 2.8% prior," said Vinay Viswanathan, a fixed income strategist at Goldman Sachs.

"These forecasts imply home prices will remain roughly unchanged through the year-end and then return to trend growth levels in 2024."

Two things are stoking Goldman's optimism: low inventory and strong demand.

Before the pandemic, there were two million homes for sale nationwide. Now that tally sits at about one million, according to data from the National Association of Realtors.

Builders are attempting to fill the gap in the market by stepping up their efforts to build new homes at a quicker pace. But "most of this new inventory is still under construction," said Viswanathan.

Are elevated prices sustainable?

The revised forecast comes as housing is getting increasingly unattainable for would-be homebuyers.

Inventory remains low. Meanwhile, high mortgage rates and home prices force first-time homebuyers to take on more debt than lenders are comfortable with.

"Home buyers have demonstrated behavior that, in our view, reflects unsustainable adaptations to elevated mortgage rates," said Viswanathan. "For example, the average debt-to-income ratio [DTI] on conforming purchase mortgages is over 38 percent, a significant aberration from post-Global Financial Crisis averages."

Thirty-eight percent DTI is on the higher end of the spectrum as lenders generally look for the front-end ratio to be no more than 28% and the back-end ratio no higher than 36%.

"Your DTI ratio gives a pretty good sense of the amount of additional payments you can add in your month and still keep your head above water," said Bill Maurer, director of the Institute for Money, Technology and Financial Inclusion at the University of California, Irvine.

While some lenders might overlook a higher DTI, the ration signals that homebuyers are getting stretched.

The road ahead

With Goldman's forecast of rising home prices and mortgage interest rates flirting with 8%, the outlook for American homebuyers remains bleak.

According to the S&P Dow Jones Indices and the S&P CoreLogic Case-Shiller Indices, May 2023 data show all 20 major metro markets reporting a month-over-month price increase for the third straight month.

"The rally in U.S. home prices continued in May 2023," said Craig J. Lazzara, Managing Director at S&P DJI. "Home prices in the U.S. began to fall after June 2022, and May's data bolster the case that the final month of the decline was January 2023."