Help may not be on the way for first-time home buyers frustrated by high mortgage rates and even higher home prices.
Economists at Bank of America warned this week that the US housing market is stuck, and we’re not convinced it will stall until 2026 or later.
The bank said house prices will stay high and go even higher. The housing shortage will continue. And mortgage rates may not fall much even if the Federal Reserve finally delivers long-delayed interest rate cuts.
This will take many years to work itself out. There is 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 buyers is one of patience and frustration.
Housing affordability is a huge problem in America.
Home prices rose during Covid-19 and then the Fed’s fight against inflation caused mortgage rates to rise.
The one-two punch has made it a historically unaffordable time to buy a home.
It was a strange combination. Mortgage rates rose sharply, but so did house prices. That usually doesn’t happen, Gapen said.
The supply of homes simply cannot keep up with the demand. Prices had nowhere to go but up.
The median price of a previously owned home in the US rose in May for the 11th consecutive month to a record $419,300, up 6% from a year earlier.
Bank of America expects home prices to rise 4.5% this year and then another 5% in 2025 before finally falling 0.5% in 2026.
A major problem affecting supply is the congestion effect.
People who already own their home are effectively locked into their property after refinancing or taking out a mortgage during the pandemic when extremely low rates were offered. Buying now at current rates would require them to pay hundreds of dollars more per month in interest alone. Plus, house prices have gone up.
For many people, it just doesn’t make sense to move. And because those homeowners aren’t moving, the supply of existing homes on the market is limited.
Why would I sell if I don’t have to? Gape said. Prices have gone up and mortgage rates are much higher. So I’m content to stay where I am.
Bank of America warns that the effect of the lockdown could continue for another six to eight years, maintaining a supply cap during that time.
This is because the mortgage rate of people who already own is historically low. And the rate for new buyers has been raised. Bank of America doesn’t think that gap will shrink much for years.
That problem helps explain why pending home sales fell in May to a record low, according to data released Thursday. Pending sales, tracked by the National Association of Realtors since 2001, is a forward-looking gauge of home sales that measures contract signings.
Dave Liniger, who co-founded real estate giant RE/MAX with his wife in 1973, said the foreclosure effect means people who want to size up to a bigger home can’t, and the generation of The next can’t even get a foot in the door for a starter property.
The growth market doesn’t exist, Liniger told CNN. Starter homes have doubled in value and owners would like to upgrade, but the problem is they can’t take their mortgage rate with them.
Liniger agrees that the housing market is stuck, at least for now.
We have to shuffle our way through this over a period of time, he said.
But Liniger urged first-time homebuyers to remain patient. Don’t give up on your dream, he said.
In theory, a flood of new home supply would help deflate the market.
However, Bank of America expects housing starts, a measure of new home construction, to remain flat for the next few years. And housing starts still haven’t recovered from the bursting of the housing bubble in the mid-2000s.
Divide between the haves and the have-nots
The forecast for a stuck housing market cuts both ways.
Rising home prices have filled the net worth of existing homeowners and given them additional financial flexibility.
But there are many Americans who are outside looking in. They would like to buy, but they can’t afford it at these prices and these mortgage rates.
The longer they are held back from buying, the more time they lose in wealth creation.
In a recent Gallup poll, only 21% of Americans said it’s a good time to buy a home, tied for the worst reading in Gallup’s history. An overwhelming 76% say it’s a bad time to buy.
Gapen, the Bank of America economist, said that if the US economy achieves the soft easing he expects, meaning inflation cools without triggering a recession, there is a risk that home prices will rise even more than expected.
On the other hand, if the strength of the recovery is overestimated and a recession is on the way, home prices may fall and affordability will ease.
But obviously, you don’t want to go through a recession to have better housing affordability, he said.
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