Published by CNBC | June 25, 2024
The housing market is unlikely to recover for several years and affordability won’t get any better unless a recession hits, according to Bank of America economists.
In a mostly pessimistic outlook on the sector, the bank sees a variety of factors lining up against both a major improvement in sales and a drop in prices that would bring younger buyers back into the market.
Among them are pandemic-related factors that saw a rush of buyers come into the market around 2020 and 2021, driving a dramatic spike in sales and coinciding with an inflation burst that goosed interest rates to their highest level since the turn of the 21st century.
Sales have largely been on a downtrend since, outside of a jump earlier this year amid unrealized hopes that the Federal Reserve would be cutting interest rates aggressively.
“The U.S. housing market is stuck, and we are not convinced it will become unstuck anytime soon,” Bank of America economist Michael Gapen and others said in a Monday note.
“After a surge in housing activity during the pandemic, it has since retreated and stabilized. We view the forces that have reduced affordability, created a lock-in effect for homeowners, and limited housing activity will remain in place through our forecast horizon,” he added.
The affordability situation won’t change “without a recession,” Gapen wrote.
In some respects, the housing market is a victim of its own success: Buyers swarmed in after Covid hit, taking advantage of mortgage rates around 3% and even less. Now, with 30-year rates still hovering around 7%, the “lock-in effect” has meant that owners can’t afford to sell into a market where they will pay rates more than double when they bought their homes.
That has dampened sales but not prices, with little relief expected anytime soon as Fed officials have doused hopes for significant policy easing in the near future, and as supply levels remain constrained.
Existing home sales have plummeted since early 2021 when they were at a seasonally adjusted annual rate of 6.6 million, according to the National Association of Realtors. In May, that number tumbled to 4.11 million.
Prices, though, have been slow to come down. The median price of an existing home sold last month was $419,300, according to the NAR, compared with $283,600 in May 2020.
