Miami to flee the house price correction in 2023 while ‘overheated’ housing markets like Austin get hammered, says Goldman Sachs

The Fed’s ongoing inflation fight—which saw mortgage rates spike from 3% to six% in 2022—has set off the second biggest home price correction of the post-WWII era.

On one hand, the two.4% drop in U.S. home prices seen between June and October is small relative to the housing crash’s 26% national home price decline from the highest in 2007 to the underside in 2012. Alternatively, the continued home price correction might need lots of gas left within the tank.

Look no further than a Goldman Sachs paper put out last week with the title “Getting worse before recuperating.” Researchers on the investment bank argued within the paper that the national home price correction will proceed through 2023.

“We’re lowering our 2023 forecast for year-over-year depreciation within the Case-Shiller Home Price Index to -6.1% from -4.1% previously. This is able to represent an aggregate peak-to-trough decline of roughly 10% in U.S. home prices through the tip of this yr from June 2022,” write Goldman Sachs researchers.

Through October, the lagged Case-Shiller National Home Price Index has registered a -2.4% national home price decline. Nonetheless, researchers on the investment bank estimate once we get the November and December readings, we’ll see national home prices are already down -4%. Meaning we’d already be half-way to Goldman Sachs’ estimated 10% peak-to-trough decline.

Nationally, a ten% peak-to-trough decline in U.S. home prices—which climbed 41% between March 2020 and June 2022—shouldn’t do an excessive amount of financial damage, says Goldman Sachs. Nonetheless, the firm says some regional markets won’t be so lucky.

“This [national] decline needs to be sufficiently small as to avoid broad mortgage credit stress, with a pointy increase in foreclosures nationwide seeming unlikely. That said, overheated housing markets within the Southwest and Pacific coast, corresponding to San Jose MSA, Austin MSA, Phoenix MSA, and San Diego MSA will likely grapple with peak-to-trough declines of over 25%, presenting localized risk of upper delinquencies for mortgages originated in 2022 or late 2021,” writes Goldman Sachs.

View this interactive chart on Fortune.com

In 2023, Goldman Sachs expects double-digit home price declines in major markets like Austin (-15.6), San Francisco (-13.7%), San Diego (-13.4%), Phoenix (-12.9%), Denver (-11.4%), Seattle (-11.2%), Tampa (-11.2%), and Las Vegas (-11.1%). Those markets are also the very places that the house price correction hit the toughest within the second half of 2022. Indeed, through November, Austin is down 10.4% from its 2022 peak home price.

Why does Goldman Sachs expect the correction to deliver the largest blow to markets like San Diego and Austin? The investment bank says those markets are “overheated,” which suggests that home price growth there got too detached from fundamentals during the Pandemic Housing Boom. Being detached from fundamentals packs a very hard punch when mortgage rates spike like they did in 2022.

Heading forward, Goldman Sachs thinks many Northeastern, Southeastern, and Midwestern markets could see milder corrections (if any correction in any respect). In 2023, the investment bank expects home prices to barely fall in places like Chicago (-1.8%) and Recent York (-0.3%), while its forecast has home prices rising in Baltimore (+0.5%) and Miami (+0.8%) in 2023.

View this interactive chart on Fortune.com

“Our 2023 revised forecast primarily reflects our view that rates of interest will remain at elevated levels longer than currently priced in, with 10-year Treasury yields peaking in 2023 Q3. Because of this, we’re raising our forecast for the 30-year fixed mortgage rate to six.5% for year-end 2023 (representing a 30 bp increase from our prior expectation),” write Goldman Sachs researchers. “This path would cause affordability to worsen incrementally, after a slight improvement over the past two months.”

While the investment bank expects U.S. home prices to fall 6.1% in 2023, it doesn’t expect a chronic downturn just like the previous bust: In 2024, Goldman Sachs expects U.S. home prices to rise 1% at the same time as markets like Austin and Phoenix proceed to fall.

“Assuming the economy stays on the trail to a soft landing, avoiding a recession, and the 30-year fixed mortgage rate falls back to six.15% by year-end 2024, home price growth will likely shift from depreciation to below-trend appreciation in 2024,” writes Goldman Sachs.

Whether it’s Goldman Sachs’ forecast or Moody’s outlook, the largest wildcard for any home price forecast model stays mortgage rates. (You’ll find the most recent home price forecast from 27 of the nation’s leading real estate research firms here.)

At the height in November, the common 30-year fixed mortgage rate as measured by Mortgage Rate Day by day sat at 7.37%. Nonetheless, following positive news on the inflation front the past few months, financial conditions have loosened and the common 30-year fixed mortgage rate has fallen to six.09%. If mortgage rates were to proceed falling, firms like Goldman Sachs might need to begin upgrading their home price outlooks.

On the lookout for more housing data? Follow me on Twitter at @NewsLambert.

This story was originally featured on Fortune.com

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