The lock-in effect that has suppressed activity in the U.S. housing market is unlikely to disappear this year, next year, or even the year after that.
Bank of America warned in a report released on the 24th (local time) that this effect will affect potential buyers and existing home sellers over the next six to eight years. This suggests that the housing market could remain stagnant until the next decade.
Analysts said the wide gap between current and effective mortgage rates is making most homeowners reluctant to move unless they have to. Additionally, it is expected that current mortgage interest rates will not fall significantly even if the Federal Reserve (Fed) cuts interest rates.
Homeowners rushed to refinance as borrowing costs fell as the Federal Reserve cut interest rates to near 0% during the worst part of the pandemic. As a result, effective mortgage interest rates for U.S. households have reached their lowest level on record since 1977, Bank of America said. Although it rose by about 0.5 percentage points from the lowest point, the effective interest rate in the first quarter was still a low level of 3.8%.
As the Federal Reserve begins raising interest rates in 2022 to combat inflation, current mortgage interest rates have also risen. There is now a large gap between interest rates.
According to a Realtor.com report earlier this month, more than 50% of existing mortgages have an effective interest rate of 4% or less, and more than 75% have an interest rate of 5% or less. On the other hand, the current 30-year fixed interest rate is still maintained at the 7% level.
The supply of existing homes has tightened as homeowners are reluctant to give up low effective interest rates, and this spring's selling season has been slow.
Existing home sales hit a seasonally adjusted annual rate of 4.14 million in April of this year, a figure that Bank of America noted has been virtually unchanged for nearly 18 months.
The bank expects this sales pace to remain relatively constant over the next few years, projecting total sales of 4.1 million in 2024, 4 million in 2025, and 4.2 million in 2026.
Analysts say the U.S. housing market is stagnant and are not confident the situation will improve in the near future. It added that housing market activity surged during the pandemic, then retreated and stabilized.
With supply still limited and demand remaining high due to the impact of the pandemic, Bank of America expects home prices to rise 4.5% in 2024, 5% in 2025, and then stabilize at 0.5% in 2026. However, he warned that if pandemic-related factors persist, it could rise another 5% in 2026.
It seems difficult to expect help with newly built houses. The bank forecast that housing starts in 2024, 2025, and 2026 will average 1.4 million households, and new home sales will remain at the level of 650,000.
However, some in the real estate industry believe that even a small drop in mortgage rates could lead to a surge in housing market activity.
Earlier this month, Robert Reffkin, co-founder and CEO of Compass, told CNBC he was positive about a 6.5% rate, but said the magic number was 5.9999%.
He added that this would be marketing attractive and would let the world know that mortgage rates have reached a level where it is worth buying a property.