Rising mortgage rates are likely to outweigh a longstanding housing shortage in the US next year, leading to a drop in both the sales of existing homes and the construction of new ones, according to Goldman Sachs Research.
“In 2027, we expect the headwind from affordability to increasingly dominate, weighing further on activity,” economists Ronnie Walker and David Mericle write in a report.
They project that existing home sales will total just 3.9 million in 2027, modestly below their forecast of 4 million for 2026 but 26% below 2019 levels. Against the backdrop of slower home sales, they forecast another year of “anemic” home price growth: 0.8% December-over-December in 2027 after 1.1% in 2026 and 1.2% in 2025.
Borrowing costs are a key component of housing affordability. This year’s jump in mortgage rates—in response to the Iran War, higher oil prices, and the prospect of rate hikes by the Federal Reserve—has reduced incentives for homeowners to sell. More than 95% of mortgage borrowers have interest rates below current market rates, and 65% have rates two percentage points below market rates, creating a “lock-in” effect that is slowing sales. In order to purchase a new home, such homebuyers would need to prepay their current mortgage and take out a new mortgage at a higher rate.
“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,” Walker and Mericle write.
Rates for 30-year mortgages in the US have climbed to 7.32% (as of October 22). Goldman Sachs Research’s credit strategists expect mortgage rates to decline in 2027 but remain elevated at 6.4%. Even if that decline is realized, affordability will remain at historically poor levels.
When is US housing market activity likely to improve?
Beyond next year, Goldman Sachs Research expects existing home sales to gradually edge higher, reflecting the natural decay of the lock-in effect that comes from, for example, borrowers paying down their mortgages.
The renewed popularity of adjustable-rate mortgages in the post-pandemic period could theoretically accelerate this process as well. As rates on such mortgages reset, they tend to erode the impact of the lock-in effect, as seen in other countries where adjustable-rate mortgages are more prevalent. But that impact is likely to be modest in the US, especially over the next couple of years. Adjustable-rate mortgages represent less than 10% of all outstanding mortgages in the US, and only a small share of them will begin to reset in the coming years.
Housing activity as measured by residential fixed investment (RFI)—a component of gross domestic product that includes new home construction—is likely to begin recovering by next summer after an expected decline in the months ahead.
After posting an estimated 3.1% annualized increase in this year’s third quarter, RFI is forecast to contract by 2.5%, 4%, and 1% annualized in the three quarters that follow, respectively. Thereafter, our researchers expect activity to rebound to a 1-2% growth pace starting in the second half of next year, reflecting the impact of declining mortgage rates. If rates remain at current levels instead, that would lower their RFI growth forecasts by one to two percentage points through the end of 2027.
How higher mortgage rates are forecast to impact US homebuilding in 2027
The longstanding housing shortage has kept single-family homebuilding resistant to higher interest rates. Single-family starts have averaged 3% higher than above 2019 levels despite mortgage rates that are three-and-a-half percentage points higher today. This year, however, they have declined by 3% compared with last year, and the slippage is likely to continue. Goldman Sachs Research expects single-family starts to total 0.87 million in 2027 compared to an estimated 0.90 million in 2026.
Our economists point to the increase in the available supply of housing, as well as the corresponding compression of margins for homebuilders back to pre-pandemic levels. The elevated pace of homebuilding in recent years has eased historically tight supply-and-demand balances. When the available supply of housing improves, it tends to increase homebuilders’ sensitivity to affordability constraints. Prior analysis by Goldman Sachs Research shows that the higher the vacancy rate was the year before, the more sensitive housing starts are to mortgage rate increases.
The combination of still-solid supply growth and slightly weaker demand should push the homeowner vacancy rate higher in the months ahead, from 1.2% in this year’s second quarter to 1.4% by the fourth quarter of 2027.
Housing demand is being buoyed by domestic demographic trends that remain supportive, along with real income growth that is likely to accelerate next year, and “build-to-rent” housing, which typically involves a partnership between single-family rental companies and homebuilders to construct rental homes. But on the negative side, survey-based measures of purchase intentions have declined in recent months. Our economists also expect that reduced immigration will continue to weigh on household formation.
“We expect housing demand to remain tepid,” Walker and Mericle write.
Source: GoldmanSachs