A team of Wall Street economists has predicted that the US housing market won’t “break free” until at least 2026, and home affordability won’t improve unless there’s a recession.
Bank of America economists cited “temporary changes” in demand during the pandemic as the reason for their less-than-optimistic outlook.
“Housing activity has declined and stabilized after surging during the pandemic,” Bank of America economists Michael Gapen and Jeseo Park wrote in a report Monday.
“We expect the forces that have depressed home prices, created a homeowner lock-in effect and limited housing transactions to continue throughout our forecast period,” they added.
Sales surged as buyers flocked to the housing market to take advantage of low-interest mortgage rates during the pandemic in 2020 and 2021. Inflation then pushed interest rates up to 8% in 2022, the highest in the U.S. since the early 1980s.
Since then, U.S. home sales have been on a downward trend, declining for a third straight month in May.
Bank of America said rising interest rates and the “lock-in effect” – fewer home transactions – are likely to drive down home sales and keep younger buyers out of the market.
Economists said they expect home prices to rise about 4.5% in 2024 and 5% in 2025 due to a temporary market boost caused by the pandemic, before falling to 0.5% in 2026.
Bank of America noted that with 30-year fixed mortgage rates still hovering around 7%, it could take six to eight years for the “lock-in effect” to wear off.
“The large gap between current mortgage rates and real interest rates means that most homeowners are unwilling to move unless they are forced to,” the economists said. “Moreover, we expect current mortgage rates to only fall by a small amount if the Fed cuts rates as expected.”
Bank of America offered some hope to the market, saying “subdued” home sales, improving credit conditions and “accommodative monetary policy” should attract buyers to the market.
“Millennials should also generate structural demand for housing,” the Bank of America economists said, “but high home prices remain an issue and our macroeconomic outlook assumes slower growth and a further weakening of the labor market.”
