Housing prices reached a record high for the second straight month in April, according to the S&P CoreLogic Case-Shiller Home Price Index. Unfortunately, and as a result, Bank of America economists don’t see relief coming any time soon.
In its housing market outlook report, BofA economists believe housing market affordability is unlikely to improve absent a recession. Indeed, the bank sees a number of barriers preventing the drop in prices necessary to bring young buyers back to the real estate market.
These barriers include high interest rates and ongoing effects related to the pandemic-era spike in home sales.
“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 noted Monday. “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.”
Housing Prices Remain Elevated Despite Fed Efforts
Home prices have only continued to climb despite signs that inflation is starting to cool. Many would-be homebuyers are eagerly waiting for the Fed to cut interest rates, which many analysts speculate may not come until September at the earliest.
As it stands, the housing market is plagued by an imbalance between supply and demand. While there aren’t as many buyers in the market as in years prior, sellers are few and far between. Many pandemic-era buyers are enjoying near-rock-bottom interest rates and have little desire to sell and move onto a new mortgage with a much higher rate.
Because of this, Gapen and his peers estimate it could be almost a decade until prices ease.
“We think it could take 6 to 8 years for the lock-in effect (dearth of transactions in existing homes) to go away,” Gapen pointed out. “The wide gap between current mortgage rates and effective mortgage rates means most homeowners are unwilling to move unless forced.”
Existing home sales are down dramatically in the face of higher interest rates. In May, existing home sales slipped to 4.11 million, per the National Association of Realtors, well below the 6.6 million sales recorded in January 2021.
Despite this, median home prices have only continued to climb. The median existing home sales price reached $419,300 last month, almost 50% higher than the $283,600 median price tag recorded at the start of the pandemic.
“Millennials should also provide structural housing demand. However, affordability will remain an issue and our macroeconomic outlook assumes growth decelerates and labor markets cool further,” Gapen noted.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
