Bank of America signals a warning to first time homebuyers that housing prices and mortgage rates will still stay elevated, and to be precise in the words of Bank of America economists Michael Gapen and Jeseo Park - “The U.S. housing market is stuck, and we are not convinced it will become unstuck” and they also added that this might be until at least 2026 or later.
According to the bank, home prices are set to stay high and could increase further. The housing shortage is projected to stay the same, with little potential for significant decreases in mortgage rates, despite potential interest rate cuts by the Federal Reserve.
"This will take many years to work itself out. There isn’t a magic fix," Gapen stated, advising first-time homebuyers to brace for continued patience and frustration.
The Lock-In Effect That Can Last Up to 8 Years
One of the critical challenges contributing to the housing market's standstill is what economists call the "lock-in effect."
Many current homeowners, having secured ultra-low mortgage rates during the pandemic, are hesitant to sell their homes and face significantly higher interest payments if they were to buy again at current rates. This reluctance to sell has severely constrained the supply of homes on the market.
Dave Liniger, co-founder of RE/MAX, shared his concerns about the lack of movement in the housing market segments where homebuyers want to move into bigger and larger homes but are unable to.
"The move-up market does not exist. Starter homes have doubled in value, but owners cannot leverage their existing mortgage rates to upgrade," Liniger explained.
Looking ahead, Bank of America anticipates that home prices will continue to rise, projecting a 4.5% increase in 2024 and another 5% in 2025, with a slight decline of 0.5% expected by 2026. Housing starts, a measure of new home construction, are expected to remain flat in the coming years, further intensifying the supply-demand imbalance.
While the housing market's current dynamics have enhanced the net worth of existing homeowners, they have also widened the gap between those who own property and those struggling to enter the market.
The affordability challenge has dampened consumer sentiment, with a recent Gallup poll revealing that only 21% of Americans view it as a good time to buy a house, marking a historical low.
Gapen noted that while a soft landing for the economy could potentially mitigate further price increases, there remains a risk of continued affordability issues unless significant changes occur in the market dynamics.