Top investor bank warns of 2008-style U.S. home value crash

Goldman Sachs has warned that four U.S. cities could suffer a 2008-style crash in home values, as the investment bank predicts that San Jose, California; San Diego, California; Austin, Texas; and Phoenix, Arizona will experience a decline of more than 25 percent in home values.

The projected crash is due to continued skyrocketing interest rates and declining housing prices, similar to those witnessed during the Great Recession in 2008.

The bank stated that these cities will suffer the lowest prices this year as they became too detached from fundamentals during the COVID-19 pandemic housing boom. Goldman Sachs also forecasts that many Northeastern, Southeastern, and Midwestern markets could see milder corrections.

The report states that “Our 2023 revised forecast primarily reflects our view that interest rates will remain at elevated levels longer than currently priced in, with 10-year Treasury yields peaking in 2023 Q3. As a result, we are raising our forecast for the 30-year fixed mortgage rate to 6.5 percent for year-end 2023 (representing a 30 bp increase from our prior expectation).”

It also added that “This [national] decline should be small enough as to avoid broad mortgage credit stress, with a sharp increase in foreclosures nationwide seeming unlikely. That said, overheated housing markets in the Southwest and Pacific coast, such as San Jose MSA, Austin MSA, Phoenix MSA, and San Diego MSA will likely grapple with peak-to-trough declines of over 25 percent, presenting localized risk of higher delinquencies for mortgages originated in 2022 or late 2021.”

Goldman Sachs expects home prices to dip slightly in New York City (-0.3 percent) and Chicago (-1.8 percent), while Baltimore (+0.5 percent) and Miami (+0.8 percent) will see higher prices. However, the bank added that “Assuming the economy remains on the path to a soft landing, avoiding a recession, and the 30-year fixed mortgage rate falls back to 6.15 percent by year-end 2024, home price growth will likely shift from depreciation to below-trend appreciation in 2024.”