Western US cities like San Diego and Phoenix are seeing rapid home-price depreciation, Goldman Sachs says.
The lineup of bank failures that began in early March sparked fears of systemic failure in the financial system.
But with no new victims making headlines in the past few weeks, investors are now turning their attention to the ripple effects. Specifically, they’re watching whether banks will tighten lending standards even further as a response to the scare, and one area of the economy that is highly dependent on lending conditions is real estate.
Credit strategists at Goldman Sachs expect a more muted impact on residential lending relative to other types like business and commercial. But muted doesn’t mean none: the gap between cities already seeing home-price declines and those seeing increases will widen, according to Goldman’s Chief Credit Strategist Lotfi Karoui. He observed that affordability in weaker markets is still an issue. And if banks tighten standards further, more people with lower incomes and weaker credit scores will be shut out of the market, hurting demand in already struggling cities.
“In our view, metro-level home prices will be more instructive than national prices when monitoring mortgage credit stress,” Karoui said in a recent client note.
To be sure, the housing market is more resilient to tighter standards now compared to 2008, when subprime mortgages caused the crisis. That very experience led to stricter scrutiny of lending requirements, causing the housing market to be better prepared to deal with challenging economic environments.
Furthermore, lending requirements in residential real estate had already been tightening over the last six months, according to the report. This suggests that the sector was secured well before the banking crisis.
But according to Karoui, there will remain a clear gap between the best and worst-performing cities.
US existing home median sales prices have been gradually declining over the past year. In June 2022, the median home price peaked at $414,000 before it began dropping, down to $363,000 in February. The slowdown is expected to continue, though not unilaterally, according to Karoui. Some areas such as San Diego, Phoenix, and San Francisco are expected to experience more rapid declines. On the other end, metropolitan areas that have limited inventory and are affordable will be better off.
