Unless a recession hits, the housing market is unlikely to recover and affordability will not improve for several years, Bank of America economists said. The bank is mostly pessimistic about the sector’s prospects, arguing that a number of factors are working against a sharp improvement in sales and falling prices that would attract younger buyers back to the market. These include pandemic-related factors that caused buyers to flood the market around 2020 and 2021, driving a huge surge in sales and a burst of inflation that sent interest rates to their highest levels since the early 2000s. Sales have been trending downward since earlier this year as hopes of a sharp rate cut from the Federal Reserve failed to materialize. “The U.S. housing market is in trouble and we don’t believe it will get out of trouble anytime soon,” Bank of America economist Michael Garpen and others said in a report on Monday. “After a surge in housing activity during the pandemic, it has since Pull back and stabilize. We believe the forces that reduce affordability, lock-in effects on homeowners, and limited housing activity will continue across our forecast horizon,” he added. Gapon wrote that affordability conditions would not change “without a recession.” In some ways, the housing market is a victim of its own success: Buyers have rushed in since the coronavirus outbreak to take advantage of mortgage rates around 3% or even lower. Now, with 30-year rates still hovering around 7%, the “lock-in effect” means homeowners can’t afford to put their homes on the market because they would have to pay more than double the interest rate they paid to buy their homes. That has dampened sales but not prices, with little relief expected in the short term as Fed officials have dampened hopes for significant near-term easing and supply levels remain constrained. “We think the lock-in effect (the lack of existing home transactions) may take six to eight years to dissipate,” Gapon said. “The large gap between current mortgage rates and effective mortgage rates means that most homeowners will Forced, or otherwise unwilling to move.” In fact, existing home sales have plummeted since the start of 2021, when they posted a seasonally adjusted annual rate of 6.6 million units, according to the National Association of Realtors. In May, that number plummeted to 4.11 million. However, prices are slowly falling. The median price of an existing home sold last month was $419,300, compared with $283,600 in May 2020, according to NAR. The company expects prices to rise 4.5% in 2024, followed by a 5% increase in 2025 before falling back to 0.5% gains in 2026. 5% jump in 2026. The bank believes “moribund” sales levels, coupled with “modest improvements” in lending conditions and lower interest rates, could help the housing market return to health. “Millennials should also provide structural housing demand. However, affordability remains an issue and our macroeconomic outlook assumes decelerating growth and a further cooling of the labor market,” Gapon wrote.
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