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Homeowners are getting historically low mortgage rates while new buyers are getting higher rates, a gap that Bank of America doesn’t expect to close much over the next few years.
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CNN
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Help for first-time home buyers frustrated by high mortgage rates and ever-increasing home prices may not be coming soon.
Economists at Bank of America warned this week that the U.S. housing market is “in a tailspin that is not likely to resolve with any certainty until 2026 or beyond.”
The bank said home prices will remain high and likely rise, the housing shortage will continue and mortgage rates may not fall much even when the Federal Reserve finally delivers its long-overdue rate cuts.
“This is going to take years to resolve itself. There’s no magic solution,” Michael Gapen, head of U.S. economics at Bank of America, told CNN in a phone interview. “The message to first-time homebuyers is patience and frustration.”
Home buying is a big problem in America.
Home prices have soared during the COVID-19 pandemic, and mortgage rates have subsequently soared as the Fed tries to combat inflation.
These two factors have made it a historically unaffordable time to buy a home.
“It’s a strange combination. Mortgage rates have gone up a lot, but home prices have gone up too. That doesn’t normally happen,” Gapen said.
Housing supply can’t keep up with demand, so prices can only go up.
The median price of an existing home in the U.S. rose for the 11th consecutive month in May, hitting a record high of $419,300, up 6% from a year ago.
Bank of America expects home prices to rise 4.5% this year, rise another 5% in 2025, and finally fall 0.5% in 2026.
One of the major issues adversely affecting supply is the “lock-in effect.”
Those who already own homes are essentially tied to their properties after refinancing or taking out mortgages during the pandemic when ultra-low interest rates were available.. Buying at today’s interest rates could mean paying hundreds of dollars more each month in interest alone, plus home prices are rising.
For many people, moving doesn’t make sense, and because those homeowners aren’t moving, there’s a limited supply of existing homes on the market.
“Why sell unless you absolutely have to?,” Gapen says. “Prices have gone up and mortgage rates are a lot higher, so I’m happy with where I am.”
Bank of America warns that the lock-in effect could last for the next six to eight years, constraining supply during that time.
That’s because mortgage rates are historically low for existing homeowners and high for new buyers, a gap that Bank of America doesn’t expect to close much over the next few years.
Dave Liniger, who co-founded real estate giant RE/MAX with his wife in 1973, said the lock-in effect prevents people who want to move up to a bigger home from doing so and discourages the next generation from even buying their first property.
“There’s no market for upgrading to a better home,” Liniger told CNN. “First homes have doubled in value and owners want to upgrade, but the problem is they can’t carry over mortgage rates.”
Liniger agrees that the housing market is stagnant, at least for now.
“We’re going to have to weather this for a while,” he said.
But Liniger urged first-time homebuyers to be patient. “Don’t give up on your dreams,” he said.
In theory, a large supply of new homes would help stabilise the market.
But Bank of America expects housing starts, a measure of new home construction, to remain flat for the next few years, and housing starts have yet to recover from the collapse of the housing bubble in the mid-2000s.
The divide between the haves and the have-nots
The prediction that the housing market will “stuck” is two-sided.
Rising home prices have increased the net worth of existing homeowners, providing them with more financial flexibility.
But there are a lot of Americans on the outside looking in. They want to buy, but can’t at these prices and mortgage rates.
The longer you are prohibited from making purchases, the longer you miss out on wealth creation opportunities.
In a recent Gallup poll, only 21% of Americans said it’s a good time to buy a home, tied for the worst mark in Gallup’s history. An overwhelming majority (76%) say it’s a bad time to buy a home.
Bank of America economist Gapen said if the U.S. economy achieves a soft landing as expected and inflation subsides without triggering a recession, there is a risk that home prices will rise more than expected.
On the other hand, if the durability of the economic recovery is overestimated and a recession is on the horizon, home prices could collapse and home affordability could worsen.
“But obviously you don’t want to go through a recession to improve housing affordability,” he said.
