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U.S. HOUSING MARKET'S AGONY COULD SEE SOME RELIEF NEXT YEAR

Residential investment could bounce back next year and housing demand will be resilient after a painful second-half of 2024, Goldman Sachs analysts said, even though mortgage rates will likely remain elevated.

Goldman projected residential fixed investment growth $(RFI)$ of above 3.7% in 2025 on q-o-q basis compared to its prior forecast of over 2.5%.

"We expect housing demand to remain firm, reflecting supportive demographic trends and a healthy labor market," said Goldman analysts led by chief economist Jan Hatzius.

Last week, data showed U.S. existing home sales dropped to a 14-year low in September, weighed down by higher mortgage rates and house prices.

The second straight monthly decline in home resales reinforced economists' views that the slump in residential investment, which includes homebuilding, deepened in the third quarter.

However Hatzius cautioned, "The prospect that long-term rates will remain elevated continues to present a headwind to the economy’s most interest rate sensitive sector."

The housing market has struggled to rebound after being knocked down by a resurgence in mortgage rates in the spring.

Even though higher mortgage rates might hurt the housing market, 85% of mortgage borrowers have interest rates below current market rates, and almost 70% have rates 2 percentage points below market rates, Goldman stated.

That said, Hatzius expects existing home sales to rebound to just 4.1 million in 2025, 23% below 2019 levels and only modestly above 2024's forecast of 4 million.

Goldman argues that mortgage rates may not decline even if the Fed continues to lower the fed funds rate, "Not necessarily, because current mortgage rates already reflect the bond market’s expectation of several cuts this year and next."

"Instead, what matters more is how much the FOMC (Federal Open Market Committe) actually eases relative to what is expected", the brokerage added.

Technical factors such as volatility due to lower interest rates and renewed demand for mortgage-backed securities from commercial banks could acts as catalysts for mortgage rates to remain elevated.

While single-family homebuilding activity is likely to remain elevated, multifamily construction is expected remain depressed in 2025, Goldman added.

The PHLX housing index .HGX is up 20.7% on the year but is down 3.2% for the month.

(Kanchana Chakravarty)

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(Terence Gabriel is a Reuters market analyst. The views expressed are his own)