The housing market is ‘stuck' until at least 2026, Bank of America warns

Help may not be on the way for first-time homebuyers frustrated by high mortgage rates and even higher home prices. Economists at a bank warned this week that the US housing market is ‘stuck and we are not convinced it will become unstuck’ until 2026 — or later. The bank said home prices will stay high and go even higher. The housing shortage will persist. And mortgage rates may not fall much — even if the Federal Reserve finally delivers long-delayed interest rate cuts. Housing affordability is a major problem in America. Home prices spiked during Covid-19 and then the Fed’s war on inflation sent mortgage rates surging. The one-two punch has made it a historically unaffordable time to buy a home. The supply of homes simply cannot keep up with demand. Prices have had nowhere to go but up. The median price of a previously owned US home climbed in May for the 11th month in a row to a record $419,300 — up 6% from a year earlier. One major problem hurting supply is the ’lock-in effect.’ People who already own their home are effectively locked into their property after refinancing or getting a mortgage during the pandemic when ultra-low rates were available. Buying now at current rates would require them to pay hundreds of dollars more per month on interest alone. Plus, home prices have gone up. For many, it just doesn’t make sense to move. And because those homeowners are not moving, the supply of existing homes on the market is limited. Bank warns the lock-in effect could persist for another six to eight years, keeping a lid on supply during that time. That’s because the mortgage rate of people who already own is historically low. And the rate for new buyers is elevated. Bank doesn’t think that gap will shrink much for years. The move-up market does not exist. Starter homes have doubled in value and the owners would like to move up but the problem is they can’t take their mortgage rate with them. But urged first-time homebuyers to remain patient. In theory, a flood of supply of new homes would help unstick the market. However, bank expects housing starts — which is a measure of newly constructed homes — to remain flat for the coming years. And housing starts have still not recovered from the bursting of the housing bubble in the mid-2000s. The forecast for a ‘stuck’ housing market cuts both ways. The spike in home prices has padded the net worth of existing homeowners and given them additional financial flexibility. But there are many Americans who are on the outside looking in. They’d like to buy but can’t afford to at these prices and these mortgage rates. The longer they are prevented from buying, the more time they miss out on wealth creation. In a recent poll, just 21% of Americans said it is a good time to buy a house, tied for the worst reading in history. An overwhelming majority — 76% — say it’s a bad time to buy. One economist said if the US economy achieves the soft landing that he expects, meaning that inflation cools without triggering a recession, there is a risk that home prices will rise even more than anticipated. On the other hand, if the durability of the recovery has been overestimated and a recession is on the way, home prices could tumble and affordability would ease. ‘But, obviously, you don’t want to go through a recession to have better housing affordability,’ he said.