By Mike Bodeen · 30 January 2023
Many of our readers may have heard about or read last week’s Goldman Sachs story claiming four U.S. cities, Phoenix, San Diego, San Jose and Austin, will suffer huge price drops in 2023. My initial reaction was steam beginning to build up inside, which was about to give way to anger, then to who knows what.
My usual response to media stories about local real estate, is to give my opinion, then see what transpires. Everyone has a right to their opinion, but this story, however, I could not leave alone without addressing, and who better to have address this, than the real local experts, The Cromford Report, which they immediately did last week.
“I went away with the impression that Ara Hovnanian has his head screwed on tight and that the Goldman Sachs housing analyst has lost the plot.” —The Cromford Report—
I reprint their response here verbatim:
“There is a story run by Fox Business News today (1-23-23) that quotes Goldman Sachs making all kinds of weird and unlikely forecasts. Not quite sure how to deal with it because its description of the current Phoenix market bears little comparison with the real world. Some quotes are:
Goldman Sachs expects home values to worsen through 2023 amid continued skyrocketing interest rates and declining housing prices
four US cities will suffer the most catastrophic dips, drawing comparisons to the 2008 housing crash
Phoenix Arizona will likely see noticeable increase before drastic decreases of more than 25%
My comments are:
We saw skyrocketing interest rates in 2Q and 4Q of last year. The idea that interest rates will skyrocket in 2023 seems more than a little far-fetched when the inflation rate is falling. It could happen, but to have this as your base case seems very irresponsible.
Is Goldman Sachs really saying Phoenix home prices will go up and then drastically down? Come on now, there is no data that supports that outlook. Just a wild-ass guess?
In the Great Recession, the median price in Phoenix declined from a peak of $265,000 in June 2006 to a low of $109,000 in May 2011. That is a fall of almost 60%. Please let us not compare 60% with 25%. They are not similar.
Since the peak in May 2022 of $475,000, the median was down to $412,000 by December. This is a fall of 13% so far.
The lack of coherent thinking in the text of the article contrasts with the interview with Ara Hovnanian that appears on the same web page. I went away with the impression that Ara Hovnanian has his head screwed on tight and that the Goldman Sachs housing analyst has lost the plot. Maybe Sky Business garbled the message that Goldman Sachs put out?
Also confusing are Goldman Sachs recent forecasts of interest rates:
November – mortgage rates will drop to 5% by March and property values will rise 1.8%
December – 6.2% average rate for 2023
January – 6.5% by 2023 year end (not sure how skyrocketing takes place in this context)
No-one has ever been very good at forecasting mortgage interest rates more than a couple of weeks in advance. This includes the Mortgage Bankers Association and it especially includes Goldman Sachs whose track-record on interest rate forecasts is extremely poor. This is not saying much because there is no-one who gets them right more than by random chance. Any time spent listening to people making interest rate forecasts is time you could have spent more productively.”
Of course, there is a caveat to all of this, and that is mortgage rates. Having been active in the residential real state market since the 70’s and remembering the early 80’s of mega inflation and ginormous mortgage rates, if that scene plays out again, then yes, there will be a large drop in the market – EVERYWHERE. But even IF that happens, there will then be a rebound. There always is.
But let’s get real. Right now, we are starting out the year in an upswing market with 13 out of 17 cities reporting a statistically balanced or seller’s market, and all cities, save one, are trending positive for sellers. This movement in the market is happening while rates are in the 6.5% range. As I’ve shared in the past, there is a pent-up demand for housing, and smart buyers are now moving forward to buy.
Yes, we’ve taken a value hit since the last half of ’22. This will now reverse course if the current trends hold, which, as mentioned is now upwards. And this is where one has to look at the foundations of our market, including employment, supply and demand of our housing, our perennial population increases, and the major growth of business, to correctly understand that as I’ve been reporting before, our primary concern statewide is property prices continuing to rise which could further destroy the American dream of home ownership for future generations.
Market data referenced in this article comes from The Cromford Report.