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Real estate market ‘stuck’ until at least 2026, Bank of America warns


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CNN

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 are not confident it will unblock” before 2026 – or later.

The bank said property prices would remain high and rise further. The housing shortage will persist. And mortgage rates may not fall much, even if the Federal Reserve eventually lowers long-delayed interest rates.

“This will take many years to establish. There’s no magic solution,” Michael Gapen, head of the U.S. economy at Bank of America, said in a phone interview with CNN. “The message to first-time home buyers is one of patience and frustration.”

Housing affordability is a major problem in America.

Housing prices soared during the Covid-19 crisis, then the Fed’s war on inflation sent mortgage rates soaring.

The doubling made this period a historically unaffordable time to buy a home.

“It’s a strange combination. Mortgage rates have increased substantially, but housing prices have also increased. That’s not usually what happens,” Mr. Gapen said.

Housing supply simply cannot keep up with demand. Prices had no choice but to increase.

The median price of a used home in the United States climbed in May for the 11th consecutive month to a record $419,300, up 6% from a year earlier.

Bank of America expects house prices to rise 4.5% this year, then another 5% in 2025, before finally falling 0.5% in 2026.

One of the major problems affecting supply is the “lock-in effect”.

People who already own their homes are effectively stuck in their property after refinancing or getting a mortgage during the pandemic when ultra-low rates were available.. Buying now at current rates would force them to pay hundreds of dollars more per month in interest alone. Additionally, house prices have increased.

For many, it just doesn’t make sense to move. And because these homeowners aren’t moving, the supply of existing housing on the market is limited.

“Why should I sell unless I have to?” » said Gapen. “Prices have increased and the mortgage rate is much higher. So, I’m happy to stay where I am.

Bank of America warns that the lock-in effect could persist for another six to eight years, limiting supply during that time.

That’s because mortgage rates for existing homeowners are historically low. And the price for new buyers is high. Bank of America doesn’t think that gap will narrow much for years.

That problem partly explains why pending home sales fell to a record low in May, according to data released Thursday. Pending sales, tracked by the National Association of Realtors since 2001, is a forward-looking indicator of home sales that measures contract signings.

Dave Liniger, who co-founded real estate giant RE/MAX with his wife in 1973, said the lock-in effect means people who want to own a bigger home can’t, and the next generation can’t even get their foot in the door for a starter property.

“The promotions market doesn’t exist,” Liniger told CNN. “First home values ​​have doubled and homeowners would like to move up, but the problem is they can’t take their mortgage rate with them. »

Liniger agrees that the real estate market is stuck, at least for now.

“We have to manage in this situation for a while,” he said.

But Liniger urged first-time home buyers to remain patient. “Don’t give up on your dream,” he said.

In theory, a massive supply of new housing would help the market take off.

Bank of America, however, expects housing starts – which measure the number of newly constructed homes – to remain stable in the years to come. However, housing starts have still not recovered from the bursting of the real estate bubble in the mid-2000s.

Divide between haves and have-nots

The prediction of a “stuck” real estate market cuts both ways.

Soaring property prices have increased the net worth of existing homeowners and given them additional financial flexibility.

But there are a lot of Americans on the outside. They would like to buy but cannot afford it at these prices and mortgage rates.

The longer they are prevented from buying, the more time they lack to create wealth.

In a recent Gallup poll, only 21% of Americans said it was a good time to buy a home, marking the worst result in Gallup history. An overwhelming majority (76%) say it’s a bad time to buy.

Gapen, the Bank of America economist, said that if the U.S. economy achieves the soft landing he hopes for, that is, inflation calms without triggering a recession, there is a risk that real estate prices will rise even more than expected.

On the other hand, if the durability of the recovery has been overestimated and a recession is underway, house prices could fall and homeownership affordability would decline.

“But, obviously, you don’t want to go through a recession to have more affordable housing,” he said.

News Source : www.cnn.com
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