High mortgage rates, limited inventory continue to challenge the US housing market

Episode Summary

Executive Summary: Goldman Sachs’ Roger Ashworth argues the housing market remains historically tight because high mortgage rates, post-pandemic demand pull-forward, and the lock-in effect have sharply reduced both demand and existing-home supply. He expects only modest rate relief, continued elevated home prices, and a gradual normalization rather than a sharp rebound in sales.

Main Topics: Why home sales collapsed: Ashworth says sales fell mainly due to the jump in mortgage rates, plus demand pulled forward during the post-pandemic housing rush and the lock-in effect that keeps owners from selling. Inventory and the lock-in effect: Most homeowners are locked into much lower mortgage rates, keeping listings scarce and supply near multi-decade lows. New home construction and builder activity: New-home sales are improving somewhat, but labor, materials, and supply-chain constraints prevent a major supply response. Demand remains structurally supported: Demographics, life-stage household formation, and investor demand still underpin housing demand, though affordability is a major brake. Home price outlook and regional differences: Goldman raised its 2024 home-price forecast to about 5%, with stronger appreciation expected in underbuilt older metros and weaker outcomes on the expensive West Coast. Mortgage rates and the Fed: Lower Fed rates should help mortgage markets indirectly via lower volatility, better MBS valuations, and improved bank demand, but the pass-through is not one-for-one. Credit quality and downside risks: Housing credit remains resilient because homeowners have substantial equity and foreclosure rates are low, though consumer stress is showing up in credit cards and auto loans.

Key Arguments: Higher mortgage rates created an affordability shock: a $450,000 mortgage costs about $1,800/month at 3% but about $3,000/month at 7%, pushing demand out of the market. The market is constrained by the lock-in effect; about 97% of the mortgage market is out of the money to refinance, discouraging moving and suppressing inventory. Home sales were additionally depressed because pandemic-era demand was pulled forward and now needs to be “given back” over time. Inventory remains very low at roughly 3.5 to 3.7 months of supply versus a long-term average near 5 months, so prices have a floor. New-home supply is improving, but builders are still constrained by lingering supply-chain, labor, and material issues, limiting the ability to offset weak existing-home supply. Demand is not disappearing: the 25- to 44-year-old cohort is expected to keep growing until 2035, supporting household formation and homeownership demand. Despite affordability pressures, homeowners have significant equity, which keeps mortgage delinquencies and foreclosures low and limits forced selling. Goldman expects mortgage rates to decline only moderately, ending 2024 around 6.3%, with further improvement to about 6% by end-2025. The biggest macro risks are sticky inflation, delayed Fed easing, or an economic shock that reduces income and employment, which could weaken housing demand and prices.

Data Points: Existing home sales: around 3.7 million - Current run rate cited as low relative to history Mortgage rate (2021): 3% - Illustrated as the pre-shock rate environment Mortgage rate (end of 2022): about 7% - Used to show the rapid rise in borrowing costs Mortgage rate (end of 2023): about 7.8% / almost 8% - Peak affordability pressure period Current mortgage rate: around 7% - Approximate rate at time of recording Monthly payment on $450,000 mortgage at 3%: about $1,800/month - Example of affordability before rates rose Monthly payment on $450,000 mortgage at 7%: about $3,000/month - Example of affordability after rate shock Mortgage market locked out of refinancing: 97% out of the money - Shows why homeowners are reluctant to move Months of supply: 3.5 to 3.7 months - Depressed inventory level in the housing market Long-term average months of supply: about 5 months - Historical benchmark for normal inventory Months of supply during post-pandemic frenzy: around 2 months - Extremely tight inventory during the housing surge Single-family new-home share of sales: about 15% - Around the long-term average mix of new vs. used homes Post-financial-crisis low new-home share: around 7% - Evidence of underbuilding after the crisis Projected unemployment rate: high 3% range - Expected to rise only slightly, supporting housing stability Job openings gap: 2.4 million more openings than unemployed people - Supports a tight labor market and low forced selling Debt-to-income ratio: around 39% - Measure of stretched affordability for homebuyers Institutional ownership share of housing stock: up to 5% - Largest institutional investors’ estimated holdings Investor share of transactions, post-financial-crisis: around 14% - Investor purchases in an earlier period Investor share of lowest-priced home purchases now: up around 26% - Shows heightened investor activity at the low end Non-individual investors’ share of single-family ownership: about 25% - Harvard Joint Center estimate for the broader category Home-price forecast for 2024: around 5% appreciation - Goldman’s revised national outlook Prior annualized home-price growth: around 8% - Recent momentum heading into year-end Metro-area models covered: about 380 metro areas - Geographic home-price forecasting framework 25- to 44-year-old population trend: expected to grow until 2035 - Demographic support for housing demand Fed cut assumption: 25 bps cuts four times in 2024 - Base case underlying rate forecasts Mortgage rate forecast for year-end 2024: around 6.3% - Expected moderate decline from current levels Mortgage rate forecast for end-2025: around 6.0% - Further gradual normalization Real income growth expectation: 2.75% - Baseline assumption; shock risk could lower housing demand

Pivotal Quotes: "The affordability shock that happened certainly dried up a lot of the demand." — Roger Ashworth: Explaining why mortgage-rate increases crushed home-buying activity "Around 97% of the mortgage market right now is out of the money to refinance their loan and likely not thinking about moving anytime soon." — Roger Ashworth: Describing the lock-in effect that suppresses supply "We are actually projecting home prices to appreciate around 5% this year." — Roger Ashworth: Goldman’s updated national home-price forecast

Implications: Housing is likely to stay tight, with only gradual relief from lower rates. Buyers may face elevated prices and limited inventory, while sellers remain reluctant unless mortgage rates fall meaningfully. Builders and investors may help at the margin, but not enough to restore normal supply quickly.