As we all know, the US economy and housing market are in constant flux. Some significant changes will impact the housing market, and Goldman Sachs has given its opinion on what we should expect regarding home prices. These changes may make the next few weeks very interesting, indeed!

Behind closed doors, the FDIC is currently overseeing negotiations between First Republic Bank and private investors to keep the bank out of government hands. This is the next bank in line to fall due to the credit market issues, but it won’t be the last. The emergency Bank lending facilities are soaring again, despite the belief that the SVB failure was a one-and-done issue.

According to the FED, the emergency bank lending facilities are soaring again, which is alarming as it suggests that more banks may be facing liquidity issues. In fact, we’re seeing US banks selling bonds heavily, particularly their longer-dated bonds, which could indicate that they’re trying to prevent falling into the same position as First Republic Bank.

Traders are also homing in on what these banks are doing because it’s not just the emergency funding facilities being used but also the fact that a massive amount of money is being pulled out of bank accounts and into money market funds. There are even rumors swirling around the market that other countries are talking to each other about some sudden event that will shake the US financial system in the coming days or weeks.

So, what does this mean for the housing market? Well, it’s critical to understand that banks tightening credit availability is essential to this correction and can really speed up the deceleration of home prices. For instance, Vornado Realty Trust, a significant company that owns a lot of commercial and residential real estate, has already gotten hammered since the banking crisis began last month. Moreover, anyone who doesn’t have a fixed-rate mortgage right now is being squeezed, which means that home prices could be negatively impacted.

However, Morgan Stanley has predicted that the FOMC meeting will result in a 25 basis point rate hike, bringing the peak rate of the tightening cycle to 5.1 percent. The impact of tighter credit conditions is uncertain, but robust job gains and high inflation support the May hike, while uncertainty supports a lengthy pause. It’s critical to keep rates above 5 percent for at least until 2024 or longer to prevent a sudden shock to home prices.

Goldman Sachs has researched the impact of rate hikes on home prices, and their model implies a smaller hit to house prices from higher mortgage rates. However, the effect tends to be more drawn out, and it takes time for the full effect to pass through to home prices. If the Fed were to suddenly begin cutting rates, we could see a significant raise in home prices, which is not good news for the housing market.

In summary, we’re expecting a quarter-point hike at the next FOMC meeting, followed by at least a one-year pause to see the full impact of these higher rates passed through to home prices. Keeping rates at these new elevated levels is critical to prevent a significant fall in home prices. The housing market is already in a bubble, and prices must come down to match homebuyers’ incomes, but we need to manage the process carefully to prevent a sudden shock to the market.

Traders are watching the banks closely as U.S. banks have begun selling bonds heavily. Why? They may have real duration exposures, and they want to get ahead of it before they fall into the same position that First Republic is in right now. The longer they wait, the more leaks that surface, which could make it harder and harder for them to get these bonds off their balance sheets without incurring unmanageable losses.

Meanwhile, there are a lot of rumors swirling around the markets that other countries are talking about a sudden event that will shake the U.S. financial system in the coming days or weeks. While these rumors are unverified and may just be noise, it makes you think that something bigger may be happening right now.

The primary catalyst for this comes from the credit markets, which we are watching closely. In a few days, we will get the first look at just how tight lending standards have become, and Banks tightening credit availability is critical to all of this. It can really speed up the deceleration of not just home prices, but economic growth overall, especially for real estate.

Goldman Sachs has extensively researched how much of an impact rate hikes have on home prices. Their model implies a smaller hit to house prices from higher mortgage rates, although the effect tends to be more drawn out. Specifically, they estimate that a 100 basis point increase in mortgage rates lowers house prices by around two and a half percent, but it takes time to realize the full effect. It can take 10 to 15 quarters to see 90 to 100 percent of the full realized impact pass through home prices.

The housing market is currently experiencing a bubble where prices are too high and need to come down to better align with the incomes of potential home buyers. The Federal Open Market Committee (FOMC) plans to increase interest rates by a quarter point at their meeting to address this issue. However, it’s important to note that we need at least a one-year pause to see the full impact of these higher rates on home prices. In short, we hope these actions will help restore the housing market to a more stable and sustainable level.