Help may not be on the way for first-time homebuyers frustrated by high mortgage rates and even higher home prices.
Economists at Bank of America 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.
“This will take many years to work itself out. There isn’t a magic fix,” Michael Gapen, head of US economics at Bank of America, told CNN in a phone interview. “The message for first-time homebuyers is one of patience and frustration.”
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.
“It’s been a weird combination. Mortgage rates rose substantially but so did home prices. That typically doesn’t happen,” said Gapen.
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.
Bank of America expects home prices will climb by 4.5% this year and then by another 5% in 2025 before eventually dipping by 0.5% in 2026.
‘Lock-in effect’ could persist for eight years
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.
“Why would I sell unless I have to?” said Gapen. “Prices have gone up and the mortgage rate is a lot higher. So, I’m content to stay where I am.”
Bank of America 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 of America doesn’t think that gap will shrink much for years.
This problem helps explain why pending home sales fell in May to a record low, according to data released on Thursday. Pending sales, tracked by the National Association of Realtors since 2001, are a forward-looking gauge of home sales that measures contract signings.
‘They can’t take their mortgage rate with them’
Dave Liniger, who co-founded real estate giant RE/MAX with his wife in 1973, said the lock-in effect means people who want to size up to a bigger home can’t, and the next generation can’t even get their foot in the door for a starter property.
“The move-up market does not exist,” Liniger told CNN. “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.”
Liniger agrees that the housing market is stuck, for now at least.
“We have to muddle our way through this for a period of time,” he said.
But Liniger urged first-time homebuyers to remain patient. “Don’t give up the dream,” he said.
In theory, a flood of supply of new homes would help unstick the market.
However, Bank of America 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.
Divide between haves and have-nots
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 Gallup poll, just 21% of Americans said it is a good time to buy a house, tied for the worst reading in Gallup history. An overwhelming majority — 76% — say it’s a bad time to buy.
Gapen, the Bank of America 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.
