The housing market is facing a bleak future, according to Bank of America economists. They predict that the market is unlikely to recover for several years, and affordability will not improve unless a recession occurs. The bank’s economists paint a mostly pessimistic picture of the sector, pointing to various factors that are working against a significant improvement in sales and a decrease in prices that would attract younger buyers.
One of the key factors contributing to the stagnation in the housing market is the “lock-in effect” that has been created by the current situation. Buyers rushed into the market during the pandemic, taking advantage of historically low mortgage rates. However, with rates now hovering around 7%, homeowners are unable to sell their homes and buy new ones at significantly higher interest rates. This “lock-in effect” has led to a decrease in sales, while prices have remained stubbornly high.
Bank of America economists predict that it could take anywhere from 6 to 8 years for the lock-in effect to dissipate and for housing market transactions to return to normal levels. The wide gap between current mortgage rates and the rates at which homeowners bought their homes means that most homeowners are reluctant to move unless absolutely necessary. This slow recovery process is further exacerbated by the limited supply of homes on the market and the lack of significant policy easing by the Federal Reserve.
While existing home sales have plummeted since early 2021, prices have remained relatively high. Bank of America expects some moderation in prices over the next few years, with a 4.5% increase in 2024 followed by a 5% rise in 2025. However, the firm anticipates a moderate decrease to a 0.5% increase in 2026. In the worst-case scenario, prices could see another 5% jump in 2026 if pandemic forces persist.
The housing affordability index, after showing signs of improvement earlier this year, dropped to its lowest level since November 2023 in May. Despite the potential for “moribund” sales levels to improve slightly and a more favorable lending climate, affordability remains a significant issue. Millennials are expected to drive structural housing demand, but without significant improvements in affordability, the market may struggle to fully recover.
The future of the housing market looks grim according to Bank of America economists. The current conditions, including the lock-in effect, high prices, limited supply, and affordability concerns, all suggest a prolonged period of stagnation for the housing market. While there may be some modest improvements in sales and prices over the next few years, a significant recovery does not seem likely without major changes to the market dynamics. Millennials and structural housing demand may provide some support, but overall, the outlook remains pessimistic.