The Cromford Report News, Commentary & Daily Observations 1/26/2023

The Cromford Report News, Commentary & Daily Observations

Report for January 26, 2023 updates posted January 26th

January 26, 2023

There is a story run by Fox Business News today 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.

Click here for the link - scroll down to page 3 to read the article.

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 (click here for the video). 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)

Nobody 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 nobody 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.

Goldman Sachs says 4 US cities will suffer a 2008 crash in home values

foxbusiness.com/economy/goldman-sachs-says-4-us-cities-will-suffer-2008-crash-home-values

Landon Mion

Goldman Sachs

Published January 25, 2023 2:31am EST

Four U.S. cities could see housing prices reach 2008 levels

Goldman Sachs expects home values to worsen through 2023 amid continued skyrocketing interest rates and declining housing prices.

The firm wrote to clients earlier this month that it predicts four U.S. cities will suffer the most catastrophic dips, drawing comparisons to the 2008 housing crash.

San Jose, California; San Diego, California; Austin, Texas; and Phoenix, Arizona, will likely see noticeable increases before drastic decreases of more than 25%.

These declines would be similar to those witnessed during the Great Recession in 2008. Home prices across the U.S. fell around 27% at the time, according to the S&P CoreLogic Case-Shiller index.

Goldman Sachs expects home values to worsen through 2023 amid continued skyrocketing interest rates and declining housing prices. (Reuters Photos)

"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," Goldman Sachs strategists wrote, according to the New York Post. "As a result, we are raising our forecast for the 30-year fixed mortgage rate to 6.5% for year-end 2023 (representing a 30 bp increase from our prior expectation)."

In 2022, mortgage rates jumped from 3% to 6%.

"This [national] decline should be small enough as to avoid broad mortgage credit stress, with a sharp increase in foreclosures nationwide seeming unlikely," Goldman Sachs wrote. "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%, presenting localized risk of higher delinquencies for mortgages originated in 2022 or late 2021."

San Jose, California; San Diego, California; Austin, Texas; and Phoenix, Arizona (pictured), will likely see noticeable increases before drastic decreases of more than 25%. (iStock / iStock)

The bank says these cities will suffer the lowest prices this year because 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.

Home prices are expected to dip slightly in New York City (-0.3%) and Chicago (-1.8%), while Baltimore (+0.5%) and Miami (+0.8%) will see higher prices, the firm said.

"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% by year-end 2024, home price growth will likely shift from depreciation to below-trend appreciation in 2024," Goldman Sachs wrote. The average 30-year fixed mortgage rate was at 7.37% at its peak in November.