Bank of America warns housing market is ‘stuck’ until at least 2026

New York
CNN
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There may not be help on the way for first-time homebuyers who are frustrated by rising mortgage rates and even housing prices.

Economists at Bank of America warned this week that the US housing market is “frozen and we are not convinced it will break free” until 2026 – or later.

The bank said that home prices will remain high and may rise further. The housing shortage will continue. And mortgage rates may not fall much — even if the Fed finally decides to cut interest rates after a long delay.

In a phone interview with CNN, Michael Gapen, head of US economics at Bank of America, said: “It will take many years for this problem to be solved. There is no magic solution. The message to first-time homebuyers is patience.” And frustration.”

Housing affordability is a big problem in America.

Home prices soared during the COVID-19 pandemic, and then the Fed’s war on inflation sent mortgage rates soaring.

The one-two punch has made it a historically unaffordable time to buy a home.

“It was a strange combination. Mortgage rates went up dramatically, but home prices went up as well. That doesn’t usually happen,” Jabin said.

The supply of homes simply couldn’t keep up with demand. Prices had nowhere to go but up.

The median price of previously owned homes in the United States rose in May for the eleventh consecutive month, reaching a record high of $419,300 – An increase of 6% over the previous year.

Bank of America expects home prices to rise 4.5% this year and then another 5% in 2025 before eventually falling 0.5% in 2026.

One of the main problems that hurts supply is the “lock-in effect.”

People who already own homes are being locked into their property after refinancing or taking out a mortgage during the pandemic when extremely low interest rates were available.. Buying homes now at current prices would cost them hundreds of dollars more each month in interest alone.

For many, it doesn’t make sense to move. And because these homeowners aren’t moving, the supply of existing homes on the market is limited.

“Why would I sell my house if I didn’t have to?” Jabin said. “Prices have gone up and mortgage rates have gone up a lot. So, I’m content to stay where I am.”

Bank of America warns that the impact of the shutdown could last for another six to eight years, maintaining a supply lid during that period.

This is because the mortgage rate for people who already own it is historically low. The price for new buyers is raised. Bank of America doesn’t think this gap will shrink much for years.

This issue helps explain why Pending home sales in May fell to an all-time lowAccording to data released Thursday, pending sales, which the National Association of Realtors has tracked since 2001, are a forward-looking gauge of home sales that measures when contracts are signed.

The lock-in effect means people who wanted a bigger home can’t, and the next generation won’t even be able to afford their own, said Dave Leniger, who co-founded real estate giant RE/MAX with his wife in 1973. Foot in the door for starter ownership.

“The upside market is not there,” Linger told CNN. “The value of the starter homes has doubled and the owners want to move up, but the problem is they can’t take the mortgage rate with them.”

Liniger agrees that the housing market is stuck, at least for now.

“We have to work our way through this for a while,” he said.

But Linger urged first-time homebuyers to be patient. “Don’t give up on the dream,” he said.

In theory, an influx of new home supply would help destabilize the market.

However, Bank of America expects new home construction — a measure of newly constructed homes — to remain steady over the coming years. Housing starts have yet to recover from the bursting of the housing bubble in the mid-2000s.

division between haves and have nots

The outlook for a “stuck” housing market bodes well in both directions.

The surge in housing prices has increased the net worth of current homeowners and given them additional financial flexibility.

But there are many Americans who are looking abroad. They want to buy but they can’t afford it at these prices and these mortgage rates.

The longer they are prevented from buying, the more they miss the opportunity to create wealth.

In a recent Gallup poll, only 21% of Americans said now is a good time to buy a home. tied for the worst reading in Gallup historyAn overwhelming majority – 76% – say this is a bad time to buy.

If the U.S. economy achieves the soft landing he expects, meaning inflation eases without causing a recession, there is a risk that home prices will rise to higher levels than expected, said Jabin, an economist at Bank of America.

On the other hand, if the strength of the economic recovery is overestimated and a recession is on the way, home prices may decline and affordability may decline.

“But obviously you don’t want to go through a recession until you can have better housing affordability,” he said.