THE locking effect that has kept activity in the U.S. housing market at a moderate level is unlikely to disappear this year, or next year, or even the year after that.
It could weigh on potential buyers and sellers of existing homes for six to eight years before finally disappearing, Bank of America warned in a note Monday, locking the market into the next decade.
“The wide gap between current mortgage rates and effective mortgage rates means most homeowners are unwilling to move unless forced to do so,” the analysts said. “Additionally, we don’t expect current mortgage rates to fall much, even if the Fed cuts them as we expect.”
When borrowing costs were lower at the height of the pandemic, as the Federal Reserve cut rates to near zero, homeowners rushed to refinance, leaving American households with the lowest effective mortgage rate never recorded since 1977, according to BofA. It rose about half a percentage point from its trough, but the effective rate was still at its lowest, at 3.8%, in the first quarter.
As the Fed began raising rates in 2022 to combat inflation, current mortgage rates have also increased. There is now a significant spread between the rates.
Earlier this month, a report from Realtor.com stated more than half of current mortgages have an effective rate of 4% or less, and more than three-quarters have a rate of 5% or less. Meanwhile, the current 30-year fixed rate still hovers around 7%.
With homeowners unwilling to give up their low effective rates, the supply of existing homes has been tight and this year’s prices have increased. spring sales season has been muted.
Existing home sales reached a seasonally adjusted annual rate of 4.14 million in April of this year, barely moving in nearly 18 months, BofA noted.
The bank estimates that this pace will remain relatively stable in the years to come, forecasting sales of 4.1 million for the whole of 2024, 4 million in 2025 and 4.2 million in 2026.
“The US housing market is in a jam, and we are not convinced it will unjam anytime soon,” the analysts wrote. “After a surge in housing activity during the pandemic, it has since declined and stabilized.”
With supply still limited and demand still high due to the pandemic-induced shock, BofA expects house prices to jump 4.5% in 2024 and 5% in 2025, before finally calm down with an increase of 0.5% in 2026. But prices could still increase by 5%. in 2026 if pandemic-related factors persist, analysts warn.
And don’t expect much help from newly built housing. The bank projects housing starts will average 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 believe even a modest drop in mortgage rates could trigger a burst of activity in the housing market.
Earlier this month, Compass co-founder and CEO Robert Reffkin told CNBC that he “would feel good” about a rate of 6.5%, “but the magic number is 5.9999”.
“It would be marketing magic and it would tell the world that mortgage rates are at a level where they should go and snap up a property,” he said.
