Bank of America warns that the housing market is “stuck” until at least 2026

New York
CNN
—

There may be no help on the way for first-time homebuyers who are frustrated by rising mortgage rates and even home prices.

The U.S. housing market is “frozen and we’re not convinced it will come out of the freeze” until 2026 — or later, Bank of America economists warned this week.

The bank said that house prices will remain high and rise further. The housing shortage will continue. Mortgage interest rates may not fall by much — even if the Fed finally implements long-awaited interest rate cuts.

“It’s going to take many years to solve this problem. There’s no magic bullet. The message to first-time homebuyers is patience and frustration,” Michael Gapen, head of U.S. economics at Bank of America, told CNN in a phone interview.

Housing affordability is a big problem in America.

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

The double whammy has made buying a home a historically unaffordable time.

“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 cannot keep up with demand. Prices had nowhere to go but up.

The average 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 by 4.5% this year and then by another 5% in 2025 before eventually falling by 0.5% in 2026.

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

People who already owned their homes were effectively tied up in their property after refinancing or taking out a mortgage during the pandemic when extremely low rates were available.. Buying now at current rates would require them to pay hundreds of dollars more per month in interest alone. Plus, home prices have gone up.

For many, it makes no sense to move. Because these homeowners are not moving, the supply of existing homes on the market is limited.

“Why would I sell my house unless I had to?” Jaben 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 warned that the impact of the lockdown could last another six to eight years, limiting supply during that period.

That’s because mortgage rates for people who already own are historically low. And the price tag for new buyers is being raised. Bank of America doesn’t think that gap will narrow much for years.

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

The foreclosure effect means people who want a bigger home can’t, and the next generation can’t even get their foot in the door for a first-home property, said Dave Liniger, who co-founded real estate giant RE/MAX with his wife in 1973.

“The market for a move up doesn’t exist,” Leniger told CNN. “Starter homes have doubled in value and owners want to move up, but the problem is they can’t take the mortgage rate with them.”

Linger 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 Liniger urged first-time buyers to be patient, saying: “Don’t give up on the dream.”

In theory, an influx of new home supply should help pull the market out of a slump.

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

A division between the haves and the have-nots

The housing market is expected to be “stalled” in both directions.

The significant increase in home prices has increased the net worth of existing homeowners and given them additional financial flexibility.

But there are many Americans watching from the outside looking in. They want to buy but can’t afford it at these prices and mortgage rates.

The longer they are prevented from buying, the more time they lose building wealth.

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

Jabin, an economist at Bank of America, said that if the US economy achieves the soft landing that he expects, meaning that inflation calms down without causing a recession, then there is a risk that housing prices will rise to higher levels than expected.

On the other hand, if the strength of the 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 in order to have better housing affordability,” he said.