BoA Has Grim News for Homebuyers

The US housing market is “stuck and we are not convinced it will become unstuck” until 2026 — or later, according to economists at Bank of America.

“This will take many years to work itself out. There isn’t a magic fix,” Michael Gapen, head of US economics at Bank of America, told CNN.

The news it delivered was uniformly grim for homebuyers. Home prices will stay high and go even higher, it said, while inventory will remain scarce. It doesn’t expect mortgage rates to fall much either — even if the Federal Reserve finally delivers long-delayed interest rate cuts. (Although it should be noted that mortgage rates have declined for four consecutive weeks, inching down to 6.86% from 6.87% a week prior, according to Freddie Mac).

Furthermore, “Once home prices reach their new higher level, their effect on home price appreciation should fade,” the analysts wrote. “This is not to say home prices will fall. Instead, one important source of home price appreciation should be behind us.” That is because pandemic distortions are normalizing and their effects will likely disappear completely by 2025, Bank of America said. After that, any appreciation will be carried by housing fundamentals, albeit at a more moderate pace.

Home prices are predicted to climb by 4.5% this year and then by another 5% in 2025 before dropping by 0.5% in 2026, according to BoA. It also warns that the lock-in effect – in which homeowners stay put because they are locked into cheaper rates – could persist for another six to eight years.