Housing market outlook: The lock-in effect could last for the next decade
The lock-in effect that has kept US housing market activity low is unlikely to end this year or next year or even the year after that.
It could hang on to would-be buyers and sellers of existing homes for six to eight years before it goes away, Bank of America warned in a note on Monday, shutting down the market for the next decade.
“The wide gap between mortgage prices and the value of affordable housing means that many homeowners are unwilling to move unless forced to,” say analysts. “Furthermore, we don’t expect mortgage rates to drop significantly even if the Fed cuts as much as we expect.”
While borrowing costs fell during the height of the pandemic as the Federal Reserve lowered rates to near zero, homeowners rushed to refinance, leaving American households with the lowest mortgage rates on record dating back to 1977, according to BofA. It rose about half a point from its trough, but the effective rate was still down 3.8% in the first quarter.
As the Fed begins raising rates in 2022 to fight inflation, mortgage rates are rising as well. Now there is a big gap in values.
Earlier this month, a Realtor.com report said more than half of outstanding loans have an effective rate of 4% or lower, and more than a third have an effective rate of 5% or lower. Meanwhile, the current 30-year fixed rate is still hovering around 7%.
With homeowners unwilling to give up their low effective rates, the supply of existing homes has been tight and this year’s spring sales season has been muted.
Existing home sales hit an annualized rate of 4.14 million in April of this year, an 18-month low, BofA noted.
The bank sees that the pace remains low in the coming years, predicting sales of 4.1 million throughout 2024, 4 million in 2025, and 4.2 million in 2026.
“The U.S. housing market is stagnant, and we’re not sure it will recover anytime soon,” the analysts wrote. “After the surge in housing activity during the violence, it has slowed down and stabilized.”
With supply still lagging and demand still rising from the pandemic-induced shock, BofA expects home prices to jump 4.5% in 2024 and 5% in 2025, before cooling to 0.5% in 2026. But prices could rise another 5%. in 2026 if factors related to the epidemic persist, analysts warn.
And don’t expect much help in newly built homes. The bank sees housing starts averaging 1.4 million stable units in 2024, 2025, and 2026, with an estimated 650,000 new home sales in those years.
But some in the real estate industry think that even a small drop in mortgage rates could trigger a housing market boom.
Earlier this month, Compass founder and CEO Robert Reffkin told CNBC that he would “feel good” about the 6.5% figure, “but the magic number is 5.9999.”
“That would be marketing magic, and it would tell the world that mortgage rates are at a point where they have to go and replace,” he said.
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