It's a rough housing market, and Goldman Sachs expects it to get worse

By Steve Goldstein

The housing market may get worse before it gets better.

As bad as it is for the housing market - starts and transactions basically flat for the last three years with mortgage rates over 7%- it can get still get worse.

"In 2027, we expect the headwind from affordability to increasingly dominate, weighing further on activity," Ronnie Walker, an economist at Goldman Sachs, told clients in a note that published Monday.

Walker points out that mortgage rates have already jumped nearly 1.5 percentage points from their February trough. More than 95% of mortgage borrowers - some 60% of homeowners - have interest rates below current market rates, and 65% of them have rates more than 2 percentage points below market rates.

"The combination of mortgage borrowers refinancing at low rates en masse in 2020 and 2021 and the high current level of mortgage rates has created a significant financial cost to moving, as buying a new home would require homebuyers to prepay their current mortgage and take out a new mortgage at a significantly higher rate," says Walker.

Goldman is forecasting 3.9 million existing home sales next year - which is slightly below 2026 levels and some 26% below 2019 levels.

True, there's a growing share of adjustable-rate mortgages, but it's still pretty modest at about 8% of the market.

And while the supply of available housing has improved, it's still tight by historical standards.

There are some positive demand factors, like demographic trends and expectations of incomes outpacing inflation, but survey-based measures of purchase intentions have declined sharply in recent months, and reduced immigration will continue to weigh on household formation, said Walker.

Housing plays in the stock market have struggled this year. The State Street SPDR S&P Homebuilders ETF XHB has slumped 9%, and the iShares Mortgage Real Estate ETF REM has tumbled 24%.

-Steve Goldstein

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10-20-26 0413ET