One of the top economists in the US sees significant problems in the real estate market. Are we on the verge of a…

Jan Hatzius is often notable for his bearish forecasts, where he scored a major forecasting success before the 2007-2008 financial crisis. He currently brings us his view on the real estate market, where things are not looking good in the coming months and overall in 2023. We take a look at the concerns of this popular economist and break down the substantial data that backs up his words.

Jan Hatzius

Why is Jan Hatzius considered one of the best economists?

Jan Hatzius is the chief economist at investment bank Goldman Sachs. His bearish forecasts before the 2007-2008 financial crisis made him very popular and his opinions are highly regarded. In fact, this is confirmed by the fact that he is a two-time winner of the Lawrence R. Klein Award for the most accurate US economic forecast.

The U.S. housing market has likely fallen into its first recession in more than a decade, and economist Hatzius warns that investors should prepare for the downturn here to get worse. In a note to clients, he predicts that activity in the housing sector will slow sharply in the coming months, with price growth eventually falling to zero in the third quarter of next year.

"We expect home price growth to come to a complete halt and average 0% in 2023," said a Goldman analyst led by Jan Hatzius. "While outright declines in national home prices are possible and seem quite likely in some regions, large declines in home prices seem unlikely."

  • The analysts' remarks come at a time when painfully high inflation and rising borrowing costs have forced potential homebuyers to back off spending.

What are the main problems in the property market?

Simply put, home sales continue to fall while prices remain high, severely damaging and constraining supply.

Mortgage rates are skyrocketing and there are regularly a growing number of potential buyers who end up backing out of a potential deal. As a result, sales are falling to their lowest level in two years, which is constraining the construction of new homes where this is supporting high prices.

The main problem may be a sustained reduction in affordability

However, a sustained reduction in affordability and a drop in purchase intentions could lead to further weakening of home sales, driving prices down across the board, Hatzius wrote in a note.

"Higher mortgage rates and reduced affordability are not the only drag on housing," he said. "Existing home sales and building permits have fallen more sharply this year in regions where they increased the most earlier in the pandemic, suggesting that the recent declines also reflected a partial retreat in pandemic-related support for housing demand."

Overall, the Goldmans forecast sharp declines in new home sales (down 22%), existing home sales (down 17%) and housing GDP (down 8.9%) this year. They also forecast further declines in 2023, including another 9.2% decline in housing GDP next year.

Confidence among builders in the US housing market plunged more than expected in August to its lowest level since the start of the COVID-19 pandemic, as painfully high inflation and rising borrowing costs forced potential buyers to pull out.

The housing market index provides another warning signal

U.S. NAHB Housing Market Index

The National Association of Home Builders Housing Market Index, which measures the pulse of the housing market, fell for the eighth straight month to 49, marking the worst stretch for the housing market since the 2008 financial crisis.

Any number above 50 is considered positive - the gauge hasn't entered negative territory since a brief but steep decline in May 2020. As you can see, the current reading is 49, which indicates some trouble.

Theindex is down significantly from a year ago when it was 80. However, the value peaked at a 35-year high of 90 in November 2020, buoyed by record low interest rates at the same time.

"Tighter Federal Reserve monetary policy and persistently higher construction costs have caused the housing recession," said NAHB Chief Economist Robert Dietz.

  • The expectation was that the 55 reading would be reached in August, which did not materialize.

For the record, one component of the index, which measures current single-family home sales, collapsed to 57 from 64. An indicator of expectations for single-family home sales over the next six months also fell to 47 from 50, while the index of potential purchase traffic dropped five points to 37 - deep in negative territory.

The interest rate-sensitive housing market has begun to cool noticeably in recent months as the Fed seeks to tighten policy at the fastest pace in three decades. Policymakers have already approved rate hikes of 75 basis points in both June and July.

Soaring housing costs are likely to continue to fuel a sharp rise in inflation this year, exacerbating President Biden's political crisis and creating new challenges for a Federal Reserve that is trying to cool prices without plunging the economy into recession.

Rising rents are a worrying development because higher housing costs most directly and acutely affect household budgets. Another data point, which measures how much homeowners would have paid in equivalent rent had they not bought their home, also jumped 0.7% in June from the previous month.

"We're seeing a housing recession in terms of declining home sales and home construction," Lawrence Yun, chief economist for the National Association of Realtors, said recently.

This comes at a time when consumers are facing higher mortgage rates, which rose sharply in the first half of the year when the Fed began raising rates but have cooled in recent weeks amid growing concerns about the state of the U.S. economy and the threat of an impending recession. However, rates rose again last week after Fed Chairman Jerome Powell gave a speech in which he promised to fight inflation "vigorously", regardless of the potential economic impact.

Conclusion

A slew of new economic data released earlier this month shows that the sector is starting to slow down significantly: homebuilder sentiment in the sector has fallen to its lowest level in two years, buyers are pulling out of the market as they cancel home sales at the fastest pace since 2020, and builders are reassessing construction and in some cases halting it. Of course, I am no expert on the real estate market, so my opinion is from a layman's perspective that sees a series of deterioration, declining interest in home purchases and no gradual decline in prices, which experts believe will extend well into 2023. I think this could be a problem that will plague us for some time to come, but I really can't say at this point if the consequences will be as catastrophic as some individuals are mentioning.

What is your opinion on this? 🤔

Please note that this is not financial advice. Every investment must go through a thorough analysis.

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