The lock-in effect that has held back activity in the U.S. housing market is unlikely to be lifted this year, next year or the year after.
Bank of America warned in a Monday note that the situation could be a headache for buyers and sellers of existing homes for six to eight years before eventually clearing up, locking in the market for the next decade.
“The large gap between current mortgage rates and real interest rates means that most homeowners have no intention of moving unless they are forced to,” the analysts said. “Furthermore, even if the Fed cuts rates, as we expect, we don’t expect current mortgage rates to fall much.”
As the Federal Reserve slashed interest rates to near zero during the pandemic, borrowing costs fell and homeowners rushed to refinance, pushing effective mortgage rates for U.S. households to the lowest since 1977, according to Bank of America. While up about half a percentage point from the lows, effective rates were still low at 3.8% in the first quarter.
As the Fed began raising interest rates to combat inflation in 2022, current mortgage rates have also risen. There is currently a large difference in interest rates.
A Realtor.com report earlier this month found that more than half of outstanding mortgages have effective interest rates below 4 percent and more than three-quarters are below 5 percent, while current 30-year fixed rates are still hovering around 7 percent.
The supply of existing homes is tight, leading to a slow spring selling season this year, as homeowners are unwilling to give up low effective interest rates.
Bank of America noted that existing home sales reached a seasonally adjusted annual rate of 4.14 million in April, little changed in nearly 18 months.
The bank sees this pace remaining relatively flat over the next few years, predicting sales of 4.1 million units overall in 2024, 4 million in 2025 and 4.2 million in 2026.
“The U.S. housing market is in a tailspin that doesn’t look like it’s going to ease anytime soon,” the analysts wrote. “Housing activity surged during the pandemic but has since retreated and stabilized.”
With supply still constrained by the pandemic shock and demand still high, Bank of America expects home prices to rise 4.5% in 2024, 5% in 2025, and finally level off at a 0.5% increase in 2026. But if pandemic-related factors persist, prices could rise another 5% in 2026, the analysts warned.
And don’t expect much support from new housing: The bank expects housing starts to stabilize at an average of 1.4 million in 2024, 2025 and 2026, while new home sales will average 650,000.
But some in the real estate industry believe even a slight drop in mortgage rates could spark a boom in the housing market.
Earlier this month, Compass co-founder and CEO Robert Refkin told CNBC that he would be “comfortable” with a 6.5% interest rate, but “the magic number is 5.9999.”
“It’s marketing magic and it will tell the world that mortgage rates are at levels where you should be buying property,” he said.
