Home prices will sink in these cities that were once red hot as supply starts to overwhelm demand

• Home prices are set to drop by double digits in Austin, Seattle, Phoenix, and San Francisco, Goldman Sachs said.
• Those four cities have seen big increases in inventory, and supply is overwhelming demand, analysts wrote in a note.
• Nationwide, the outlook on home prices is less bleak, with Goldman seeing a 6.1% decline.

Out of the country's 25 largest metropolitan areas, four cities stand out for having particularly dim housing forecasts, according to Goldman Sachs.

By late 2024, home prices will decline by 19% in Austin, 12% in Seattle, 16% in Phoenix and 15% in San Francisco compared to late-2022 levels, the bank said in a note on Thursday.

While the housing market overall remains tight, those four cities have seen big increases in inventory, and supply is overwhelming demand, analysts said.

"Rather than being indicative of things to come across the country, we view the nascent oversupply in Pacific Coast and Southwest markets as reflecting local challenges, particularly very poor levels of affordability, pandemic-related distortions, and (in certain markets) a high concentration of employment in the technology industry," Goldman said.

Nationwide, the outlook on home prices is less bleak. Goldman sees a 6.1% decline for 2023, as mortgage rates head back up, returning to 6.5% recently. 

In October, the 30-year fixed rate reached 7% for the first time since 2002 as bond yields continued to march higher amid the Federal Reserve's aggressive rate-hiking cycle. 

Mortgage rates fell back near 6% early this month, but have since rebounded sharply as hints of sticky inflation dashed hopes the Fed would ease up on policy.

For now, housing affordability is at historic lows, Goldman Sachs researchers found. Part of the problem is the higher mortgage rates. But inventories also remain under pre-pandemic levels, and homeowner vacancy rates are at record lows, keeping prices higher.

The median existing-home price for all housing types in January was $359,000, an increase of 1.3% from the same month in 2022. 

"Even if every single home under construction was completed and listed on the market immediately," Goldman Sachs explained, "the months' supply of homes (the ratio of inventory to annual sales) would still be below historic averages."

But prospective homebuyers could see some relief on affordability as demand weakens. The National Association of Realtors said sales of existing homes have dropped for 12 straight months, hitting the lowest level since 2010.

"Home sales are bottoming out," NAR chief economist Lawrence Yun said Tuesday, adding that buyers were also starting to gain more purchasing power and potentially benefit from lower home prices. "Homes sitting on the market for more than 60 days can be purchased for around 10% less than the original list price."