Hottest Home Markets Cool as Cities That Missed Pandemic Boom Gain

America's hottest pandemic housing markets—Austin and Phoenix among them—may be on the brink of disaster. That doesn't mean the nation's entire market is at risk: Charlotte, Cleveland and Pittsburgh, for example, are poised for a pickup.

Forecasts of the hottest—and coolest—housing markets this year are evolving, driven by higher mortgage rates, work-from-home, and a lack of inventory, reflecting homeowners with cheap mortgages who are reluctant to sell.

Gains may continue for a time in some of the strongest markets of the past two years, before dropping by more than 25%, according to Goldman Sachs, which says San Jose and San Diego, California, Austin, Texas and Phoenix, Arizona would have declines similar to those during the Great Recession, when home prices nationally dropped about 27%, according to the S&P Case-Shiller Index.

"Our 2023 revised forecast primarily reflects our view that interest rates will remain at elevated levels longer than currently priced in, with 10-year Treasury yields peaking in 2023 Q3," Goldman strategists told clients. "Overheated housing markets in the Southwest and Pacific coast, such as San Jose, Austin, Phoenix and San Diego will likely grapple with peak-to-trough declines of over 25%."

Growth has already slowed in those cities: Median sales prices in San Diego rose just 0.4% in the fourth quarter, while the number of sales dropped 22% from a year earlier, according to a report released by Miller Samuel Inc. and brokerage Douglas Elliman Real Estate (DOUG). Median prices in the Greater Los Angeles area dropped 22% in the fourth quarter, while the number of sales fell 29% from a year earlier.

In more normal times, a lack of supply would drive up prices. Rising mortgage rates have thrown out that rule of thumb, said Miller Samuel's Jonathan Miller.

"Sales fell but inventory didn’t grow," Miller said in an interview with Investopedia. "That's because you have a whole contingency of homeowners wedded to their low rates and not willing to sell. If you have a 2.5% 30-year fixed-rate mortgage, how likely are you going to be to trade that for a 6.5% loan?"

Years of low "rates eviscerated inventory," Miller said. "It turns out that unusually low mortgage rates ultimately make housing less affordable."

Meanwhile, Midwestern cities like Cleveland and Pittsburgh, which largely missed the boom of the past few years, are now seeing a rise in demand.

"Pushing Charlotte to the top of the list is its forecasted annual home price growth, and Cleveland’s second-place rank can be attributed to its high market velocity and job growth," Zillow said in its forecast for 2023's top 10 markets. "While Pittsburgh is the only market in the top five with forecasted household declines, it makes up for the drop in owner-occupied homes with the fourth-highest ratio of jobs added per new home permitted."

Zillow's report said San Jose, Sacramento, Minneapolis, and Denver will be the coolest large housing markets in 2023.