The recent plunge in existing home sales is more than just a stumble; it’s a worrying echo of past financial crises.

In a startling development, home sales have plummeted below 4 million SAAR, a dismal level not seen since the foreclosure crisis in 2010. This means that, excluding the aftermath of the Great Financial Crisis, home sales have reached their nadir in almost three decades.

Yet, Goldman Sachs’ Jan Hatzius and his research team send a clear message: brace for even tougher times.

In an interesting twist, the housing market’s performance is not reflected in its pricing. Prices have soared, doubling in relation to sales over the past four years. Alarmingly, this pattern mirrors the trend observed leading up to 2008’s peak, immediately before the financial meltdown.

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Goldman Sachs paints a not-so-rosy picture of the future, particularly emphasizing the role of mortgage rates. The forecast is that these rates will remain high, and the real blow to housing turnover is expected to be felt in 2024.

In a scenario where nearly every borrower is enjoying mortgage rates far below current market standards, even a drastic fall in these rates will still discourage a vast majority of homeowners from considering a move.

Here’s the kicker: almost 90% of homeowners have rates that are more than 2 percentage points below the current rates. Over 60% enjoy rates that are a staggering 4 percentage points lower.

With most mortgage borrowers having refinanced at these low rates either in the previous cycle or during the early days of the pandemic, there’s a strong financial disincentive for them to move. This is because purchasing a new home would necessitate them to pay off their existing mortgage and commit to a new one at a markedly higher rate.

This phenomenon, termed as the “lock-in” effect by Goldman, is predicted to further depress existing home sales in the upcoming months. Predictions are grim, with a projection of home sales dwindling down to 3.8 million in 2024 – a record low since the early 1990s.

Nancy Vanden Houten, lead US economist at Oxford Economics, accentuates the gravity of the situation: “The slide in home sales is far from over.” She provides a poignant reminder that the sales numbers we currently see are based on contracts inked a month or two ago. Since then, mortgage rates have increased by half a percentage point. This means that the current statistics may not even fully reflect the financial squeeze caused by these escalated rates, as any drop in home prices would hardly offset this effect.

But can the current prices be trusted? With transactions at a historical low, the validity of these prices remains questionable.

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According to Hatzius and his team, the property market is set for further fluctuations. While home prices might decline this winter, 2024 might witness only a modest rebound. The team’s sophisticated housing model forecasts a sharp deceleration in home price growth, and eventually a dip by year’s end.

But there’s a silver lining. This downturn is likely to mitigate inflationary pressures. As Goldman Sachs predicts, shelter inflation is set to decelerate to +0.42% by December 2023 and further to +0.31% by December 2024.

However, Bloomberg’s John Authers offers a stark reminder of the broader implications. A “constipated market”, combined with the rapid surge in mortgage rates pulling numerous houses off the market, poses an inevitable dilemma. While US consumers have been commendably resilient thus far, maintaining this enthusiasm might become challenging if house prices take a downturn.

The housing market stands at a critical juncture. With mortgage rates playing spoilsport and the “lock-in” effect in full swing, the path forward looks challenging. It’s a wait-and-watch game, but all stakeholders, from homeowners to investors, need to tread with caution.

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