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

Current Market Contraction Drivers

• Existing home sales have plummeted to approximately 3.7 million units annually, a level not seen in nearly three decades.
• The average mortgage payment for a $450,000 home has surged from $1,800/month at a 3% rate to $3,000/month at a 7% rate, creating a severe affordability shock.
• Approximately 97% of existing mortgages are "out of the money" for refinancing, creating a "lock-in effect" that severely restricts new supply.
• Post-pandemic demand was artificially inflated by a "mad dash" for housing and tax credits, necessitating a subsequent demand correction.
• Current inventory remains tight at 3.5 to 3.7 months of supply, well below the long-term historical average of five months.

Supply Side Dynamics and Constraints

• New single-family home construction accounts for only 15% of sales, returning to pre-COVID long-term averages rather than expanding to absorb demand.
• New home builders face persistent headwinds including loosening supply chains, high material costs, and labor shortages.
• Institutional investors currently hold roughly 25% of single-family homes, a significant increase from 18% in 2001, driven by favorable yield spreads relative to Treasury rates.
• In the secondary market, demand for Mortgage-Backed Securities (MBS) has shifted from banks (now hesitant due to capital rules) to money managers and hedge funds.

Price Outlook and Forecasts

• Goldman Sachs Research projects home prices to appreciate by approximately 5% in 2024, pulled forward by price momentum from the previous year's 8% annualized rate.
• A price floor exists due to pervasive supply constraints, preventing significant price declines despite affordability challenges.
• Geographic divergence is expected:
  • High Appreciation: Older cities with limited recent construction (e.g., Philadelphia, Northeast).
  • Moderate/Low Appreciation: West Coast markets facing migration outflows and affordability caps.
  • Mixed Outlook: Southeast markets where economic growth is stable but affordability remains strained.
• The average mortgage rate is forecast to decline to roughly 6.3% by the end of 2024 and 6.0% by the end of 2025.

Demand Sustainability and Demographics

• Long-term demand is supported by a demographic floor: the population aged 25–44 is projected to grow until 2035, historically the peak home-buying cohort.
• Homeownership rates for this demographic tend to rise from ~30% to ~60% as they reach the typical life-cycle events (marriage, children).
• Buyers are increasingly stretching, with debt-to-income ratios rising to approximately 39%.
• Natural turnover drivers (divorce, death, disability) remain relatively low, though life events may eventually force reluctant sellers off the sidelines.

Macroeconomic Risks and Credit Quality

• Inflation Risk: Persistent high inflation could delay Federal Reserve rate cuts, keeping mortgage rates restrictive and suppressing demand.
• Economic Shock Risk: A spike in unemployment could create a "vacuum of demand," lowering home sales and prices.
• Multi-family Oversupply: An oversupply in apartment construction could slow rent growth, potentially making renting more attractive than buying for marginal buyers.
• Credit Performance: Delinquencies remain generally low due to 70% average market equity ($14 trillion in mortgage principal), but subprime borrowers and credit card holders show rising distress.
• Foreclosures: Foreclosure rates remain historically low, indicating minimal distress despite higher interest rates.
• Fed Policy Expectation: The outlook assumes four 25-basis-point rate cuts by the end of 2024, which would reduce interest rate volatility and improve MBS valuations.