The US housing market will not come “unstuck” until at least 2026 — and home affordability won’t improve without a recession, a team of Wall Street economists predicted.
The economists at Bank of America cited a “one-time shift” in demand during the pandemic for their less-than-rosy outlook.
“After a surge in housing activity during the pandemic, it has since retreated and stabilized,” Bank of America economists Michael Gapen and Jeseo Park wrote in a report Monday.
“We view the forces that have reduced affordability, created a lock-in effect for homeowners, and limited housing activity will remain in place through our forecast horizon,” they added.
Buyers flooded the housing market in 2020 and 2021 during the pandemic to take advantage of low mortgage rates, causing a spike in sales. Then inflation pushed interest rates in 2022 to 8%, the highest level in the United States since the early 1980s.
The US has since seen a decline in home sales. In May, they fell for the third month in a row.
Increased rates and a “lock-in effect” — or lack of home transactions — will likely continue to fuel a decline in home sales, blocking young buyers from the market, Bank of America said.
The economists said they predict home prices will rise by about 4.5% in 2024 and 5% in 2025, then fall back to 0.5% in 2026 due to the fleeting pandemic-driven market boost.
With 30-year fixed mortgage rates still hovering near 7%, the “lock-in effect” could take six to eight years to go away, Bank of America said.
“The wide gap between current mortgage rates and effective mortgage rates means most homeowners are unwilling to move unless forced,” the economists said. “Moreover we do not expect current mortgage rates to fall much even if the Fed cuts as we anticipate.”
Bank of America did provide some hope for the market, saying “moribund” home sales, improving credit conditions and “less restrictive monetary policy” should draw some buyers to the market.
“Millennials should also provide structural housing demand,” the Bank of America economists said. “However, affordability will remain an issue and our macroeconomic outlook assumes growth decelerates and labor markets cool further.”