Housing market outlook: Lockdown effects could last into next decade
The lock effect that has caused sluggish housing market activity in the United States that probably won’t go away this year, next year or even the year after that.
It can linger on potential buyers and sellers of existing homes for six to eight years before eventually disappearing, Bank of America warned in a note on Monday, locking in the market for the next decade.
“The large gap between current mortgage rates and actual mortgage rates means that most homeowners are reluctant to move unless forced to,” the analysts said. “Furthermore, we do not expect current mortgage rates to fall much even if the Fed cuts as we anticipate.”
As borrowing costs fell during the pandemic as the Federal Reserve slashed interest rates to near zero, homeowners rushed to refinance, leaving U.S. households with the lowest effective mortgage rates on record since 1977, according to BofA. It has since climbed about half a percentage point from the bottom, but the effective rate remained low at 3.8% in the first quarter.
As the Fed begins raising interest rates in 2022 to fight inflation, current mortgage rates are also moving higher. Now there is a big gap in proportions.
Earlier this month, a Realtor.com report said More than half of outstanding mortgages have effective interest rates of 4% or lower.and more than three-quarters had a rate of 5% or lower. Meanwhile, the current 30-year fixed interest rate still fluctuates around 7%.
With homeowners unwilling to give up their realistically low interest rates, the supply of existing homes has become tight and this year Spring selling season has been muted.
BofA noted that existing home sales reached a seasonally adjusted 4.14 million units in April of this year, virtually unchanged in nearly 18 months.
The bank sees that pace remaining relatively steady in the coming years, projecting sales of 4.1 million units for all of 2024, 4 million units in 2025 and 4.2 million units next year. 2026.
“The U.S. housing market is stuck and we don’t believe it will get out of this rut anytime soon,” the analysts wrote. “After a surge in housing activity during the pandemic, it has retreated and stabilized.”
With supply still constrained and demand still high due to the pandemic shock, BofA expects home prices to rise 4.5% in 2024 and 5% in 2025, before finally cooling to a 0.5% gain in 2026. However, the analysts warn that prices could rise another 5% in 2026 if pandemic-related factors persist.
And don’t expect much help from newly built homes. The bank sees average housing starts steady at 1.4 million units in 2024, 2025 and 2026, with new home sales averaging 650,000 units in those years.
But others in the real estate industry say even a modest drop in mortgage rates could spark a boom in housing market activity.
In the first day of this month, Compass co-founder and CEO Robert Reffkin told CNBC that he would “feel satisfied” with 6.5%, “but the magic number is 5.9999.”
“It would be a marketing miracle and would tell the world that mortgage rates are at a level where they should come and buy a property,” he said.
