Wall Street: U.S. housing market to see the second-biggest home price decline since the Great Depression
Although home price declines are rare, they can happen on a regular basis. The last time it happened was during the 1980s, and it occurred again following the housing crash in 2008.
Wall Street's recent outlooks cause concern due to the lack of historical data. Not only are they predicting that the housing market is entering a slump, but they also expect it to be the second-sharpest decline since the Great Depression.
Let's take a look at where financial giants expect U.S. home prices to head next.
Morgan Stanley: U.S. home prices to fall 7%
After several years of being a part of the housing bull, Morgan Stanley joined the bear crowd last week. It now projects that the US home prices will fall by 7% by the end of 2023. This is significantly smaller than the 27% decline that the country experienced during the peak of the market in 2006. However, it's also twice as large as the 3.1% drop during the early 1990s. If the forecast comes to pass, it would mark the second-largest drop since the Great Depression.
Rising mortgage rates and home price growth have put affordability at an unprecedented level.
If the rate at which home prices are expected to drop 7% were to occur, it would put affordability at an unprecedented level. According to Morgan Stanley, the impact of this decline would only bring the market back to where it was in January 2022. Despite the negative impact of this decrease, home prices would still be 32% above their March 2020 levels.
Although Morgan Stanley maintained its base case forecast of a 7% decline, it also released two different bear and bull cases. In the case of the bull case, home prices would rise 5% in 2023 if mortgage rates begin to fall. On the other hand, if the country experiences a recession, home prices would likely drop 10%.
Rising unemployment and the increasing cost of rent are expected to further challenge the affordability of homeownership in the US. According to Morgan Stanley, this could cause existing home sales to outstrip the GFC's decline.
Goldman Sachs: U.S. home prices to fall 5% to 10%
As the housing market started to weaken this summer, Goldman Sachs maintained its positive outlook for 2023. However, last week the firm caved in.
In a new report, Goldman Sachs said that it now expects the US home prices to fall 5% to 10% in the next couple of years. This is a significant downward revision from its previous prediction, which was that they expected prices to rise by 1.8% in 2023.
According to Goldman Sachs, the firm's outlook on the housing market is now more negative due to the deteriorating outlook score and the strong mean reversion in data.
Simply put: Goldman Sachs acknowledges its 2023 outlook might still be on the conservative side.
Moody's Analytics: U.S. home prices to fall 5% to 10%
Mark Zandi, the chief economist of Moody's, says that the US isn't headed for a housing crash like the one that happened in 2008. He noted that the improving mortgage underwriting and the low vacancy rate are some of the factors that have helped prevent a repeat of the problems that caused the market to crash. However, he says that the fundamentals of the housing market are still too weak.
According to Mark Zandi of Moody's Analytics, home prices in the U.S. could fall by 10% to 15% even if a recession doesn't occur. If the country slips into a recession, home prices could drop by 10% to 15%.
When a group like Goldman Sachs or Moody's Analytics says that the US home prices or the housing market is in a positive trend, they're talking about an aggregate view of the country. However, these results will vary across different regions.
For every quarter, the ratings firm evaluates the local fundamentals of the housing market to determine if it can support its home values. If the market is significantly overvalued, it will be considered a "significant overvaluation." During the second quarter of the year, about 210 out of the country's 413 largest housing markets were considered to be significantly overvalued.
In a report released earlier this month, the credit rating agency noted that the country's overvalued housing markets could see home prices decline by 10% to 15%. If a recession hits, it projects that the home price declines could reach 20% to 25%.
Fitch Ratings: U.S. home prices could fall 10% to 15%
After a couple of weeks, credit rating agency, Fitch, gave its outlook on the housing market. It noted that the Big Three agencies are firmly on the negative side.
According to the agency, the likelihood of a severe housing decline in the US has increased. However, its outlook suggests that the market will likely experience a more moderate decline in activity in 2023 and 2024.
Although it affirmed the ratings of its US homebuilder portfolio, the agency noted that it could see pressure on its ratings due to a more pronounced downturn in the housing market. For instance, it said that the country's housing activity could fall by around 30% over the next couple of years.
If home prices fall 10% to 15%, Fortune might just rebrand the housing boom as the Pandemic Housing Bubble.