US mortgage rates are forecast to be higher than expected in the coming year, according to Goldman Sachs Research. Home prices are also projected to increase, even as borrowing costs remain elevated.
As interest rates have risen, 30-year-mortgage rates are now expected to be 7.6% at the end of 2023, up from the previous estimate of 7.1%, Goldman Sachs Research analysts Roger Ashworth and Vinay Viswanathan write in the team’s report. Similarly, the forecast for rates at the end of 2024 now stands at 7.1%, up from 6.8% previously. At the end of 2025, rates are predicted to be 6.6%.
The new forecast for mortgage rates reflects a steeper yield curve (longer-maturity Treasury yields are rising, which tends to increase mortgage rates) and Treasury yield volatility that remains “stubbornly high,” according to Goldman Sachs Research. The latter is keeping spreads (the extra interest a security yields relative to risk-free Treasuries) for mortgage-backed securities wide and is raising funding costs for mortgage originators. Over the past six months, the secondary market for MBS has begun to price in mortgage rates that stay “higher for longer.”
US home prices are forecast to climb
Meanwhile homes have appreciated despite the rise in borrowing costs: Prices grew in August by 0.9% month-over-month, reflecting an annualized 11% pace, according to Case-Shiller data. “The continued strength of the data surprised us,” Ashworth and Viswanathan write. Goldman Sachs Research expects home prices, adjusted seasonally and accounting for the full year, to appreciate 2% in 2023, 1.9% in 2024, and 2.8% in 2025.
Home prices have been buoyant amid tight supply. When it comes to existing homes, the inventory available for sale is historically low. New listings are being added at the slowest pace on record. And while new home inventory continues to rise statistically, most of this new inventory is still under construction.
Persistently higher interest rates are expected to dampen mortgage origination. Our analysts forecast $1.5 trillion in mortgages will be originated in 2024 — a figure similar to their full-year projection for 2023 — before rising slightly to $1.8 trillion in 2025. Meanwhile homeowners looking to sell their houses and buy new ones face the daunting prospect of having to prepay their current mortgages and take out fresh mortgages at today’s higher rates. This “lock-in” effect is projected to depress sales of existing homes to 3.8 million in 2024, the lowest level since the early 1990s, according to a separate report from Goldman Sachs Research.
US housing has become much less affordable
“An unfriendly byproduct of our forecasts for resilient home prices and limited rates relief is enduringly poor housing affordability,” Ashworth and Viswanathan write. The Goldman Sachs Housing Affordability Index touched a record low in late 2023, and is expected to improve only gradually over the next three years.
Affordability issues could explain why rent growth has been stronger than home price growth over the past 12 months, based on Zillow estimates. The payment gap between new mortgages and new rental leases has grown considerably across geographies (largely a function of mortgage rates), potentially encouraging first-time homebuyers to hold off purchasing a home.
“While rental affordability is also challenging in absolute terms, the stark deterioration in mortgage affordability has made renting more compelling for potential homeowners,” Viswanathan writes in a separate report.
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