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The Rising Affordability Crisis: Goldman's Prediction for Increased Home Prices in 2023
Goldman Sachs strategists have revised their earlier expectations of a drop in home prices this year. They now predict an increase, a move that could place a further burden on potential buyers who are already wrestling with high mortgage rates.
The strategists at Goldman Sachs shared a note with their clients this week, indicating that the firm now anticipates a 1.8% rise in home prices this year. This change in forecast is attributed to limited housing inventory and demand that has outpaced expectations.
The strategists noted, "The housing supply continues to tighten. The inventory of existing homes for sale remains historically low. New listings are being added at the lowest pace on record, leading to a net absorption, even amidst a weak volume of purchase applications."
Despite mortgage rates being nearly twice as high as they were three years ago, home prices have remained relatively stable. This is primarily due to a shortage of available homes for sale. Homeowners who secured a low mortgage rate before the onset of the pandemic have been hesitant to sell, leaving few options for prospective buyers.
According to a recent report from Realtor.com, the number of homes available on the market at the end of July was more than 9% lower than the same period last year and a staggering 46% lower than the average inventory before the COVID-19 pandemic hit in early 2020.
Further exacerbating the situation is the slow pace at which new constructions are being added to the market. Many houses are still under construction, leading to the slowest pace of new listing additions on record, as noted by the Goldman Sachs report.
This housing shortage has inadvertently boosted consumer demand, keeping prices stubbornly high in the face of the highest mortgage rates in two decades. The Federal Reserve's aggressive interest rate hike campaign last year sent mortgage rates above 7% for the first time in nearly 20 years. Even as rates have slowly decreased, home prices are once again on the rise as buyers adjust to these new rates.
As per Freddie Mac, rates on the popular 30-year fixed mortgage soared to 7.09% this week, significantly higher than the 5.13% rate recorded a year ago and the pre-pandemic average of 3.9%.
The Goldman Sachs strategists observed, "Homebuyers have demonstrated behavior that, in our view, reflects unsustainable adaptations to elevated mortgage rates. For instance, the average debt-to-income ratio on conforming purchase mortgages is over 38%, a significant deviation from averages following the Global Financial Crisis."
However, the strategists anticipate a fall in mortgage rates by 100 basis points by the end of next year, which may provide some stabilization in terms of affordability. Despite this anticipation, the present scenario underscores the pressing issue of housing affordability, a challenge that prospective homebuyers, policymakers, and industry players must grapple with.
As we consider Goldman Sachs' prediction of rising home prices, it's essential to contemplate the potential impact these market conditions could have on new businesses, particularly those structured as Limited Liability Companies (LLCs).
In the current real estate climate, it's clear that the ongoing housing affordability crisis isn't just a concern for potential homeowners, but also for new business owners, especially those starting an LLC. With rising property prices, these new businesses may face challenges in securing physical locations, which could impact their growth strategies.
On the other hand, this surge in prices could present unique opportunities. For example, LLCs in the construction industry could see an increase in demand for new homes as existing supply continues to tighten. There could also be more opportunities for digital businesses or those with remote working models, as more people get priced out of certain areas and possibly look towards more affordable regions or even different living arrangements.
However, the flip side to this is the challenge that businesses catering to homebuyers or homeowners may face. Businesses like furniture stores, interior design firms, or even financial businesses offering home loans could potentially see a slowdown if the number of homebuyers decreases due to high home prices and mortgage rates.
The potential fall in mortgage rates, as anticipated by Goldman Sachs strategists, might act as a breather for both potential homebuyers and businesses. A decrease in mortgage rates could help stabilize the market, making housing more affordable for buyers and possibly driving up demand for housing-related businesses.
While this scenario poses obstacles, it also offers learning opportunities for new businesses. It's a testament to the ever-evolving market conditions that businesses must navigate. Innovations in business models, services, and products are often born out of such challenges.
In conclusion, the prediction by Goldman Sachs strategists of a rise in home prices due to limited inventory and strong demand could have significant implications for new businesses, particularly LLCs. It underlines the importance of market awareness and adaptability. The current housing market conditions present both challenges and opportunities that new businesses can learn from, adapt to, and potentially leverage for growth. As the situation unfolds, it will be intriguing to see how new businesses confront these market dynamics.
