The US Housing Market is Stuck: Bank of America Predicts Years of Stagnation
The US housing market is facing a challenging future, with Bank of America economists predicting that it will remain stagnant for several years and affordability will not improve without a recession. Despite a brief surge in sales earlier this year, the market has largely retreated back to a standstill, driven by a confluence of factors that have combined to create a perfect storm of difficulty for both buyers and sellers.
Key Takeaways:
- High interest rates and the "lock-in effect" are preventing homeowners from selling. With mortgage rates still hovering around 7%, many homeowners who purchased their homes at significantly lower rates are unwilling to move and accept a higher rate.
- Affordability is plummeting. The National Association of Realtors’ housing affordability index reached its lowest level since November 2023, highlighting the challenges for potential buyers.
- Sales are expected to remain "moribund" for several years. Bank of America predicts that it could take 6 to 8 years for the "lock-in effect" to fade and for the market to see a significant increase in transactions.
- Price increases are expected to moderate, but not before 2026. While the bank predicts a 4.5% increase in prices in 2024 followed by a 5% increase in 2025, it anticipates that they will only stabilize in 2026.
- A recession could be the catalyst for a shift in the market. Bank of America economists believe that a recession would be necessary to bring about significant changes in affordability and housing activity.
The perfect storm brewing in the US housing market:
The housing market boom that emerged during the pandemic, fueled by historically low interest rates and a surge in demand, has come to a screeching halt. The "lock-in effect," a term used to describe the reluctance of homeowners to sell due to the significant jump in mortgage rates, is a major factor contributing to the stagnation. This reluctance has significantly reduced the number of available homes for sale, further tightening the market and leaving potential buyers with limited options.
"We think it could take 6 to 8 years for the lock-in effect (dearth of transactions in existing homes) to go away," said Bank of America economist Michael Gapen. "The wide gap between current mortgage rates and effective mortgage rates means most homeowners are unwilling to move unless forced."
The situation is also exacerbated by rising inflation, which has pushed interest rates to their highest levels in decades. This has significantly increased the cost of borrowing for both buyers and sellers, further dampening the market’s activity.
Affordability has taken a major hit as a result of these factors, making homeownership increasingly out of reach for many Americans. This is particularly true for millennials, who are currently facing a significant affordability hurdle as they enter the housing market.
"Affordability will remain an issue and our macroeconomic outlook assumes growth decelerates and labor markets cool further," Gapen wrote.
While the Bank of America economists are pessimistic about the short-term outlook, they do see some potential for growth in the long term. They believe that millennials’ continued demand and potential for a "modestly improving" lending climate could contribute to a gradual recovery. However, they also acknowledge that a recession could be the necessary catalyst for significant change and bring about improved affordability.
The US housing market is currently stuck in a holding pattern, waiting for a catalyst to break the current stalemate. While the factors that have contributed to this stagnation remain in place, the market’s future is uncertain and will likely hinge on how the Federal Reserve navigates interest rate policy and how the broader economy performs in the coming years.
