Housing has never been this unaffordable - and home prices are only going to keep rising, Goldman Sachs says

• Housing is even more unaffordable now than ahead of the 2008 crash, according to Goldman Sachs.
• But the bank expects limited supply and borrowers being "locked in" at lower mortgage rates to drive prices even higher.

Don't expect US house prices to slip anytime soon despite record-high unaffordability levels, according to Goldman Sachs.

Average prices will jump 1.8% year-on-year in 2023 and then another 3.5% by the end of 2024 provided there isn't any unexpected economic turmoil, the bank said in a forecast published Wednesday.

"Affordability for the incremental buyer is worse than it was at the peak in 2006 before the crash," a team led by Goldman's chief credit strategist Lofti Karoui wrote in a research note seen by Insider.

"Absent any negative shocks to the broader economy that would either boost excess supply of homes on the market or fuel an uptick in unemployment, we continue to expect home prices to rise at a slow pace," they added.

Despite housing being even less affordable than it was ahead of the 2008 financial crisis, Karoui's team expects limited supply and many borrowers being "locked in" lower mortgage rates to drive prices even higher.

Declining inventory levels have squeezed the housing market in recent years, with the US short of anywhere between 1.5 million and 5.5 million homes, according to estimates by the National Association of Realtors (NAR) and the Biden Administration. An NAR index tracking housing affordability in the US fell to a record low over June and July, according to the most recent readings.

Meanwhile, the Federal Reserve has aggressively hiked interest rates since March 2022 in a bid to crush inflation – and that's made borrowing more expensive, with the average 30-year fixed-rate mortgage soaring from 3.8% to 7.6% over the same period, per Freddie Mac.

Existing homeowners have opted to cling to the historically low rates they locked in over the last 15 years, with just 1% of Americans selling their houses over the first half of 2023.

Goldman Sachs noted that one benefit of the current tightness in the housing market is that there won't be a repeat of 2008, when home prices fell around 20% from their peak in the wake of the financial crisis.

"Looking back to the last housing market crash, we compare conditions which led to a sharp correction in home prices and find market conditions to be far more stable currently," Karoui's team said, identifying better credit standards and the death of complex financial products like subprime mortgage-backed securities as factors that will stop a similar-sized crash.