The housing market is currently facing challenges that are hindering its recovery, according to Bank of America economists. The surge in housing activity during the pandemic has since retreated and stabilized. This has created a lock-in effect for homeowners, limiting housing activity and reducing affordability. The forces that have led to these issues are expected to remain in place for the foreseeable future, making it unlikely that the market will become unstuck anytime soon.
One of the key factors impacting the housing market is the surge of buyers that entered the market around 2020 and 2021. This influx of buyers drove a dramatic spike in sales and coincided with an inflation burst that increased interest rates to their highest level since the turn of the 21st century. However, sales have been on a downtrend since then, with little relief in sight. The Federal Reserve’s reluctance to aggressively cut interest rates has further dampened hopes for a quick recovery.
Buyers who took advantage of low mortgage rates during the pandemic are now facing the lock-in effect, where they are unable to afford to sell their homes at higher interest rates. This has contributed to a decrease in sales without a corresponding drop in prices. The affordability situation is unlikely to improve without a recession, according to Bank of America economist Michael Gapen.
Bank of America expects that it could take 6 to 8 years for the lock-in effect to dissipate, leading to an increase in housing transactions. Prices may see some moderation in the coming years, with a forecasted 4.5% increase in 2024, followed by a 5% rise in 2025 that eventually moderates back to a 0.5% increase in 2026. However, there is room for forecasting errors, especially if pandemic forces continue to influence the market.
Despite the challenges facing the housing market, Bank of America sees some opportunities for improvement. The “moribund” sales levels, combined with a “modestly improving” lending climate and lower interest rates, could help nurse the housing market back to health. Additionally, millennials are expected to provide structural housing demand in the coming years. However, affordability will remain a significant issue, and the macroeconomic outlook assumes that growth will decelerate and labor markets will cool further.
The housing market is currently facing a multitude of challenges that are impeding its recovery. Affordability issues, the lock-in effect, and a lack of significant policy easing by the Federal Reserve are among the factors contributing to the market’s stagnation. While there are some opportunities for improvement in the future, it is clear that the housing market is unlikely to become unstuck anytime soon.