Bank of America predicts a delayed US housing market recovery, without a recession

Introduction

According to Bank of America economists, the housing market is unlikely to recover for several years, and affordability will only improve if a recession occurs.

In a mainly bearish perspective on the industry, the bank sees several factors working against both a significant increase in sales and a price drop that might entice younger buyers back into the market.

Among these are pandemic-related variables that caused a rush of purchasers into the market in 2020 and 2021, resulting in a huge surge in sales and an inflationary burst that pushed interest rates to their highest level since the turn of the twenty-first century.

Declined Sales

Sales have mainly declined since, except for a surge earlier this year on unfulfilled expectations that the Federal Reserve would rapidly lower interest rates.

“The US 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 note on Monday.

“Housing activity surged during the pandemic but has since retreated and steadied. We believe the causes that have reduced affordability produced a lock-in effect for homeowners, and constrained housing activity will persist over our forecast period,” he added.

The affordability crisis will not improve “without a recession,” Gapen concluded.
In some ways, the housing market is a victim of its success. Buyers flocked in following Covid, taking advantage of 3% or lower mortgage rates. With 30-year rates still lingering around 7%, the “lock-in effect” has meant that owners can’t afford to sell into a market where they’ll pay rates more than double what they paid for their homes.

That has depressed sales but not prices, with little relief on the horizon as Fed officials have dashed prospects for significant policy easing shortly, and supply levels remain tight.

“We think it could take 6 to 8 years for the lock-in effect (dearth of transactions in existing homes) to go away,” according to Gapen. “The wide gap between current and effective mortgage rates means most homeowners are unwilling to move unless forced.”

According to the National Association of Realtors, home sales have fallen sharply since early 2021 at a seasonally adjusted annual rate of 6.6 million. In May, that figure dropped to 4.11 million.

However, price declines have been modest. The typical price of an existing home sold this month was $419,300, according to the NAR, compared to $283,600 in May 2020.

Bank of America expects price moderation, but not for a few years

The firm expects prices to grow 4.5% in 2024, followed by a 5% increase in 2025, which will reduce to a 0.5% increase in 2026. However, if pandemic factors persist, the firm allows for a forecasting mistake, which may result in another 5% increase in 2026.

The NAR’s housing affordability index fell in May to its lowest level since November 2023 despite improving earlier this year.

On the plus side, Bank of America believes that “moribund” sales volumes, a “modestly improving” lending climate, and reduced interest rates could help restore housing to health.

“Millennials should also drive structural housing demand. However, affordability will remain a concern, and our macroeconomic forecast forecasts that GDP slows and labor markets cool further,” Gapen stated.